Virtualization, an essential cloud technology, is turning every ancillary computer function into software. Software Defined Networking has been around for years now, and while Cisco supports SDN, it doesn't deliver the kind of revenues and profits its previous switch lines did.
Those sales and profits are considerable. Cisco had $48 billion in sales for its last fiscal year, ending in July. Some $9.98 billion of that hit the net income line, and the company generated over $8 billion in free cash flow from operations. At 10 a.m. Tuesday, Cisco stock was trading at $21.85 per share, up 1.3% on yesterday's trading and up 4.6% over the past 12 months.
The problem is that for the first two quarters of 2014, sales seem to have slowed. The company generated just $23.3 billion in revenue for the last six months, with about $3.4 billion in GAAP net income, and margins have been on a downward trajectory for four quarters running.Cisco makes its money from switches, devices that move data between different networks. Cisco's top-of-the-line switches are now optical switches, moving data between fiber networks at speeds starting at 100 gigabits per second. But even Cisco knows that the age of high-end switching is ending. We know this because Cisco has gone from a growth stock to a yield stock. Its top line has grown just 21% over the last three full fiscal years, and the dividend now delivers a yield of 3.48%. Cisco's latest growth plan is a $1 billion investment in cloud computing over two years, which it calls "the world's largest Intercloud." The idea is to work with business partners around the world to connect their OpenStack clouds, some public and some private. Rather than building its own public or private cloud, Cisco wants to be the glue holding the clouds of its business partners together. Unfortunately, what Cisco is planning is very little money in today's cloud world. IBM (IBM) is investing in cloud at double that rate. Capital spending at Amazon (AMZN) is now almost $3.5 billion each year and Google (GOOG) spends twice as much as that.
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