For more than For a decade, Cisco has used its substantial financial resources to keep disruptions at bay. While his bread-and-butter business has always been and remains network equipment, it has spent the past 15 years trying to turn into a software and services company by regularly buying up smaller technology companies.
As I wrote last year, the company has bought 30 startups in the past few years and has a long history of building its business on top of acquired entities. If you go back to its origins in the 1990s, Cisco has been involved in over 200 acquisitions.
The approach has helped the company report decent revenue growth over the years, but the disruptive dogs may have finally caught up. The latest quarterly results, while not downright ugly, seemed to show that a company was treading water.
The bad news goes beyond the numbers
For starters, Cisco said revenue was flat from a year earlier at $12.8 billion, while analysts expected $13.3 billion — a significant difference. Unfortunately, the bad news didn’t end there.
Even if its supply chain issues are resolved, Cisco must find a way to innovate and monetize networking — something it’s struggled with for the past four to six years. Holger Mueller, Analyst at Constellation Research
The company also expects sales to fall 1% to 5.5% in the current quarter. That’s quite a broad range, but however you break it down, we’re looking at a decline while analysts were expecting growth of about 6%.
The next year also looks good, with growth of just 2% to 3%. To be clear, that’s better than declining sales, but it seems the company’s acquisition strategy isn’t doing enough to make up for the lack of revenue from its network hardware business.
Why does it matter if revenue growth is slow? Well, slowing sales growth could turn negative, and because it implies that the company’s profitability going forward will be limited by its current size.
As its rivals’ revenues rise and therefore have more potential, falling revenues could make it more difficult for Cisco to hire and buy people. to buy other companies with a stock that is in the doldrums.
We’ve seen public tech companies that fell, or flirted with, single-digit growth have come under external pressure to sell, sack leadership, or break into smaller pieces. Since Cisco probably doesn’t want any of these things to happen, the pace of revenue growth is critical.
The type of income also matters
Of late, Wall Street hasn’t even been kind to companies that have posted significant revenue increases. So perhaps it wasn’t surprising when Cisco’s stock fell 13% the day after the report.