For Cisco, the $480 million it plunked down for Linksys was money (or stock to be accurate) well spent in two ways: it gave it an immediate and dominant presence in the home networking market and provided new source of revenue besides stingy service providers.
CEO John Chambers, during a conference call with analysts yesterday, said he was pleased with the Linksys integration and is sanguine about its future contributions to Cisco’s finances. Most analysts agree, but yesterday’s report and comments from management, have some believing the bounce may take longer than expected.
Because the acquisition closed late in the quarter and Cisco uses a more conservative accounting method than Linksys, only about $20 million of Cisco’s $4.7 billion fourth-quarter revenue came from Linksys. The contribution is expected to rise to $115 million in the first quarter and $140 by the second quarter.
But revenue isn’t the only indicator of success, analysts point out, there’s also gross margin — which helps show how efficient a company is operating.
“We are lowering our (first quarter earnings per share) estimates by 1 cent to 14 cents per share as a result of higher than expected margin drag from Linksys,” analysts Raj Srikanth and Alex Barros at Deutsche Bank wrote in a reserach note this morning.
Based on numbers provided by Cisco, DB analysts expect Linksys’ gross margin to be around 27 percent next quarter. By comparison, Cisco boasts a gross margin of nearly 70 percent, although lower margins are to be expected on the consumer products.
Overall, the quarterly numbers were in line with Wall Street’s expectations, with strength in high-end router sales. But the stock dipped anyway today. Many industry-watchers were hoping Chambers would declare the end of a prolonged IT slump.
“Chambers is positive, but he is not ready to be the one to flip the switch on industry recovery,” said Bill Lesieur, director of industry advisory firm, Technology Business Research.
In related news, Linksys today rolled out a new family of compact desktop and rackmount unmanaged gigabit switches to improve the performance and reliability of small business networks.
Chambers said he expects small to medium sized businesses (SMBs) to lead the way out of the tech spending slump, followed by enterprises and finally service providers.