Big Changes at Cisco Systems, Inc. -- What Do They Mean for Investors?

By Tim

The recently announced fiscal 2015 third quarter financial results have not done much to appease Cisco investors, judging from its lackluster stock price. In fact, Cisco shares have actually declined since announcing higher-than-expected revenues and earnings per share on both a GAAP (including one-time items) and non-GAAP basis.

Tepid guidance for the coming quarter of just 1% to 3% sales growth and non-GAAP earnings per share of $0.57 certainly did not help the ho-hum results. On top of that, the earnings call last quarter was the swan song for longtime CEO John Chambers and the ushering in of Cisco vet Chuck Robbins as the new chief.

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Though Chambers said he will devote "half-time" over the next few months, it was clear Robbins holds the reins. He has wasted no time putting his stamp on what is quickly becoming a leaner, meaner Cisco.

A sign of things to comeIt was just a few days ago that Robbins wrote a blog post announcing the pending departure of two Cisco Presidents, Rob Lloyd and Gary Moore. It may not be a coincidence that Lloyd and Moore were seen by many insiders and industry pundits as likely successors to Chambers, ultimately bypassed for Robbins. Lloyd and Moore will say their final farewells in late July, the end of the fiscal year.

From the tone of his message announcing the departures of Lloyd and Moore, it sounded as if Robbins was planning additional changes. As it turns out, they included a restructured senior management team and pink slips for a few more Cisco executives. Robbins shared his new management team structure in a June 4th blog post, which included many Cisco execs occupying similar roles as they did with Chambers at the helm, along with a few promotions.

Additionally, Chief Technology and Strategy Officer Padmasree Warrior and Senior Vice President of Services Edzard Overbeek are now "strategic advisors," at least through the leadership "transition." Finally, Wim Elfrink, one of the key folks behind Cisco's push into the Internet of Everything market (IoE), will retire at the end of July.

What does it all mean?Under Chambers, Cisco has implemented several cost-cutting strategies in an effort to become more efficient, and they are already working. Last quarter Cisco enjoyed a nearly $600 million jump in revenues compared to the year-ago quarter, though its cost of sales and operating expenses only increased by a combined $200 million. For its first three fiscal quarters, cost of sales actually declined even as its revenues grew more than $1.5 billion.

In keeping with the expense management theme, building a "flatter leadership team designed for the speed, innovation, and execution that is required of us over the next decade," are the objectives behind the recent changes to the management team. And the "speed, innovation, and execution" plans are every bit as critical as implementing strict cost controls.

Cisco is no longer hedging its future on old markets like in-house data centers or PC-related hardware sales -- it has the fast-growing cloud, Internet of Everything, mobile, and security markets in its sights. The cloud and IoE industries in particular are still in their infancy, though their potential is tremendous, and Cisco is making strides in these key areas seemingly every quarter.

Cloud-related data centers are one of the key components of Cisco's "continued evolution," and the unit performed remarkably well last quarter, up 21% year-over-year with an annual run-rate of over $3 billion. Cisco also announced yet another new smart city-related innovation it dubbed "Connected Roadways" to improve traffic flow and enhance safety, along with opening two more IoE Innovation Centers.

Wireless revenues and cloud security sales are also growing, up 9% and 14% respectively, and will continue to play a larger role in driving growth going forward. Despite a collective yawn from investors, Cisco is on the right track in its transition. And Robbins' realignment of the management team should enhance the efficiency and adaptability Cisco needs to continue its transformation.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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