Follow the Bellwether

05/21/2009 1:00 pm EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith and Joshua Levine of ChangeWave Research say there are signs of an upturn in business software spending, and Cisco will be a big winner.

Recent surveys on consumer PC spending and smartphones showed a feisty resilience among spenders, while the [ChangeWave] Alliance's accounting of software demand for business showed unmistakable signs of an improvement going forward.

While overall spending [on business software] is still contracting, the 90-day outlook points to a big slowdown in the rate of decline. That's a critically important indicator suggesting that business software spending could be coming out of the recession sooner than expected.

[Eleven percent]  of software buyers said their company would spend more on software during the next 90 days—two points better than the January survey. And, while 26% still said their company would spend less, that's a huge 13-point improvement over our last survey results.

The results showed that, overall, corporate software spending is improving at a better clip than we had anticipated.

Cisco Systems (Nasdaq: CSCO) is the bellwether company when it comes to performance in the tech industry. CSCO's performance tells us how well the legions of customers who purchase products across the IT and networking spectrum are doing.

For the [third fiscal] quarter, CSCO reported earnings per share of 30 cents, excluding nonrecurring items—five cents better than the consensus. The results were attributed to strong gross margins and impressive reductions in operating expenses.

And, while revenues fell 16.6% year-over-year to $8.16 billion versus the $8.07 billion consensus, Cisco's war chest cash rose to nearly $34 billion at the end of the quarter. That compares to $26.2 billion at the end of fiscal 2008 and $29.5 billion at the end of fiscal Q2 2009.

For the first time in many quarters, Cisco said that its customers are describing their business momentum differently. Those customers are seeing some stabilization and are finally beginning to see some reasonably solid sales results.

Bookings growth was down by more than 20% for the quarter year over year, but bookings growth on an annual basis stayed consistent throughout the quarter—the first time that's happened in awhile.

It's a sign that conditions could be stabilizing and that Cisco may have found a floor. What it doesn't mean is that things are going to improve in a hurry.

With orders declining by more than 20%—and (excluding the public sector) by roughly 20% to more than 30% in each of CSCO's customer segments and geographic regions—there is still a ways to go before the company can claim a turnaround.

Through this difficult period, CSCO has done a good job at controlling costs and staying focused on longer-term opportunities that will become concrete once the economic recovery really kicks in.

Cisco is a stock that should be in your stable before the economy shifts into a higher gear. If you don't already own it then accumulate shares aggressively on pullbacks below $17.50. Our Buy Under remains $19. (It closed just below that Wednesday—Editor.)

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