Cisco, Dell and Economic Impacts

Lead Analyst: Cal Braunstein

Cisco Systems Inc. reported respectable financial results for its fourth quarter and full year 2013 but plans on layoffs nonetheless. Meanwhile, Dell Inc. announced flat second quarter 2104 results, with gains in its enterprise solutions and services that were offset by declines in end user computing revenues. In other news, recession has ended in the EU but U.S. and global growth weak.

Focal Points:
• Cisco, a bellwether for IT and the global economy overall, delivered decent fourth quarter and fiscal year 2013 financial results. For the quarter Cisco had revenues of $12.4 billion, an increase of 6.2 percent over the previous year's quarter. Net income on a GAAP basis was $2.3 billion for the quarter, an 18 percent jump year-over-year. For the full fiscal year Cisco reported revenues of $48.6 billion, up 5.5 percent from the prior year while net income for the year on a GAAP basis was $10.0 billion, a 24 percent leap from the 2012 fiscal year. The company plans on laying off 4,000 employees – or about five percent of its workforce – beginning this quarter due to economic uncertainty. According to CEO John Chambers the economy is "more mixed and unpredictable than I have ever seen it." While he sees growth in the public sector for a change, slow growth in the BRIC (Brazil, Russia, India, China) nations, EU, and U.S. are creating headwinds, he claims. On the positive front, Chambers asserts Cisco is number one in clouds and major movements in mobility and the "Internet of everything" will enable Cisco to maintain its growth momentum.

• Dell's second quarter revenues were $14.5 billion, virtually unchanged from the previous year's quarter. Net income on a GAAP basis was $433 million, a drop of 51 percent year-over-year. The Enterprise Solutions Group (ESG) achieved an eight percent year-over-year growth while the Services unit grew slightly and the predominant End User Computing unit shrank by five percent. The storage component of ESG declined by 7 percent and is now only 13 percent of the group's revenues. The server, networking, and peripherals component of ESG increased its revenues by 10 percent, with servers doing well and networking up 19 percent year-over-year. Dell claims its differentiated strategy includes a superior relationship model but that has not translated to increased services revenues. Dell's desktop and thin client revenues were flat year-over-year while mobility revenues slumped 10 percent and software and peripherals slid five percent in the same period. From a geographic perspective, the only newsworthy revenue gains or losses occurred in the BRIC countries. Brazil and India were up seven and six percent, respectively, while China was flat and Russia revenue collapsed by 33 percent from the previous year's quarter.

• Second quarter saw an improved outlook in Europe. It was reported that Eurozone GDP rose 0.3 percent, the first positive-territory reading for the Union since late 2011. Portugal surprised everyone with a 1.1 percent GDP jump while France and Germany grew 0.5 percent and 0.7 percent, respectively. Meanwhile, the U.S. economy grew 1.7 percent in the second quarter. According to the revisions, U.S. GDP growth nearly stalled at 0.1 percent in the fourth quarter of 2012, and rose 1.1 percent in the first quarter of this year (versus the estimated 1.8 percent). Additionally, venture capital has slipped 7 percent this year.

RFG POV: Cisco's financial results and actions can be viewed as a beacon of what businesses and IT executives can expect to encounter over the near term. The economic indicators are hinting at a change of leadership and potential problems ahead in some unexpected areas. The BRIC nations are running into headwinds that may not abate soon but may even get much worse, according to some economists. The U.S. GDP growth is flattening again for the third straight second half of the year and the EU, while improving, has a long way to go before it becomes healthy. This does not bode well for IT budgets heading into 2014 or for hiring. IT executives will need to continue transforming their operations and find ways to incorporate new, disruptive technologies to cut costs and improve productivity. As the Borg of Star Trek liked to say "resistance is futile." While transformation is a multi-year initiative, IT executives that do not move rapidly to cost-efficient "IT as a Service" environments may find they have put their organizations and themselves at risk.