Equipment vendor Cisco Systems Inc (San Jose, Calif., U.S.A.) slashed its long-term forecasts, acknowledging that it will find it harder to drive growth even after cutting thousands of jobs in a sweeping reorganization.
The cut, while sharp, was largely in line with Wall Street expectations and investors pushed Cisco's shares 2% higher, relieved that the overhaul was bearing fruit by reducing costs and setting Cisco on a path for slower but more stable growth.
Cisco shaved its long-term revenue growth target by roughly half to 5% to 7% from up to 17% previously, but forecast 2012 profit margins that are better than investors expected, sending its shares up 2% to $16.45.
The company also said earnings would grow at about 7% to 9% in the coming three years.
"Growing earnings faster than revenue is also a plus. This is Cisco's new world," says BGC Partners analyst Colin Cillis. "Everybody knew the old targets were off the table. It's not a surprise, it's not as bad as it could have been."
Cisco's forecast for a 2012 gross profit margin of 60% to 62% was better than expected as some investors had feared that the number would drop below 60%. The company described the forecast as "conservative."
Cisco CEO John Chambers in April launched a broad restructuring after declaring that the erstwhile Wall Street and industry darling had lost its way. It included plans to lay off 15% of staff and shutter its Flip video camera division.
Investors have turned cautiously hopeful at the pace with which the revamping has progressed since the company unveiled quarterly results in August that surpassed pared-back expectations.
Longer-term, Cisco wants to focus on increasing profit faster than sales, said Chambers.
"Cisco was very upbeat. It sounds like their efforts in terms of streamlining the company and simplifying the structure are paying off and allowing the company to execute better at least in the near term," Sterne Agee analyst Shaw Wu said.
Aggressive rivals have undercut Cisco in its core markets, pressuring margins and chipping away at its market share. Analysts had worried that efforts to ward off the competition might pressure margins. Chambers declared war on Tuesday on rivals from Juniper Networks -- which he said was at its most vulnerable -- to China’s Huawei. At Cisco's annual analysts' day, he vowed to battle Huawei on its home turf to bolster a global fight against the Chinese company, which he singled out as a "very tough" competitor.
Chambers also said he wants Cisco to generate 40% of its long-term growth from emerging markets versus 20% now. In the meantime, the executive said he was seeing positive signs from Cisco's existing customers.
"I haven't called on a customer with Cisco in the last 120 days who isn't going to keep their spending with Cisco, or increase it," Chambers told investors.
On Tuesday, Chambers said the company sees its total addressable markets -- spanning everything from Internet routers to switching -- growing some 7% to 8% annually on average in the next few years.
"In the last three years, there's been limited EPS growth, but faster EPS growth is achievable," said Auriga analyst Sandeep Shyamsukha. "We view more financial discipline and recent cost cuts as positive for shareholders."
(Editing by Gunna Dickson and Steve Orlofsky)