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Cisco, F5 Show Recovery Is Happening, Despite Washington


There are clear signs of it in the technology sector.

There's no doubt that this recession has been the worst in about 30 years, and the biggest nut yet to crack is unemployment. Currently at 10.0%, we're at levels unseen since the latter months of 1982 when it peaked at 10.8%. However, there are some signs within the technology sector that the aircraft carrier is turning, albeit slowly.

The first signal came in early November with Cisco's (CSCO) fiscal first-quarter report. After having shed about 4,000 employees (approximately 6% of headcount) over the preceding year, management indicated that it believes it had turned the corner. CEO John Chambers noted that, "Given our belief that the market is beginning to accelerate, it is probably not a surprise to anyone that you will now see us slowly starting to grow expenses..." While no specifics were provided, he indicated that the headcount growth would be "very targeted" with a focus on improving the top-line.

While Cisco's comments were about what's yet to come, F5 Networks (FFIV), another communications equipment original equipment manufacturer (OEM), has already moved forward.

The company announced results for its fiscal first quarter (ending December 2009) last night that exceeded Street consensus on both the top and bottom lines. More importantly, its guidance was for more of the same.

As you can see in the graph below, F5 took a hit like nearly everyone as the economy turned south in 2008. What had be robust top-line growth north of 20% started to plummet with the company contracting mid-single digits in the first half of 2009.

F5's reaction to its weakening outlook was like that of any company -- downsize. The next graph plots quarterly revenue versus headcount. Essentially mirroring Cisco, F5 slashed headcount about 6% from its December 2008 peak. However, after remaining down for two quarters, it's begun to add back staff to meet its top-line growth. The headcount level exiting December 2009 is now 2% above the prior peak and, based upon company guidance, it expects to add another 60-80 to that figure in the March quarter.

These are only two companies, and their experience is obviously dependent upon their customers' willingness to invest in capital equipment. However, there's also a flip side to that coin that's particularly germane to the tech sector -- build better mousetraps. Develop products/solutions that are so compelling your customers can't afford not to invest. Not an easy task but, do that, and those companies are among the best investments exiting a recession.
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