6 bright spots in Cisco’s disappointing fourth quarter report
Ciscoit is (NASDAQ: CSCO) Shares recently fell after the company continued its pace of fourth-quarter earnings with a pessimistic first-quarter outlook.
The networking hardware and software giant’s revenue fell 9% a year to $12.2 billion, beating estimates of $60 million but marking its third straight quarter of revenue declines. Adjusted earnings per share fell 4% to $0.80, but still beat expectations by $0.06.
Those growth rates were low, but it was likely Cisco’s forecasts that triggered the selloff. It expects its first-quarter revenue to decline 9% to 11% annually, missing expectations of a 7% drop, and its adjusted EPS to fall 15% to 18%, although below consensus forecasts of a 10% decline.
This gloomy outlook points to Cisco’s problems, including disruptions related to COVID-19, slow ordering from enterprise and data center customers, and competition from competitors such as Arista Networks (NYSE:ANET) and Juniper Networks (NYSE: JNPR) — won’t end anytime soon. But before ditching Cisco, investors should consider six bright spots in its otherwise disappointing report.
1. The growth of its security activity
Revenue from Cisco’s infrastructure platforms and applications has declined, but its security revenue (7% of revenue) has grown 10% annually.
Over the past eight years, Cisco has acquired a dozen cybersecurity companies, including Sourcefire, ThreatGRID and Duo Security – to develop this activity. Cisco bundles these security products with its hardware and applications to build customer loyalty.
During the conference call, CFO Kelly Kramer attributed the security unit’s growth to “good performance” in its network security, identity and access, advanced threat and unified threat management solutions. Its cloud security revenue also grew by double digits.
2. Growth of Webex and AppDynamics
Cisco’s applications revenue (11% of its revenue) fell 9% annually, due to lower demand for its unified communications platform and TP endpoint solutions (telepresence).
But within that company, revenue from its Webex video collaboration platform, which is in competition with Zoom (NASDAQ:ZM) and other similar services – grew by double digits as more people worked remotely. Kramer also said AppDynamics, which performs diagnostics and data analysis for large IT departments, has generated “solid growth.”
Cisco is not yet disclosing exact revenues from these platforms, but their strength throughout the crisis is encouraging.
3. Software and Services Segment Revenue Share
Cisco generated 51% of its revenue from software and services in fiscal year 2020, which exceeded its own goal of 50%. Subscriptions also accounted for 78% of its software revenue, easily exceeding its target of 66%.
This higher combination of software and subscriptions locks customers into Cisco’s ecosystem and widens its gap with competitors. It also generates more consistent revenue with higher margins than its hardware business.
4. Stable gross margins
Cisco’s adjusted gross margin fell 50 basis points a year to 65% in the fourth quarter, but it expects that figure to remain stable at 64%-65% in the first quarter.
By comparison, Arista’s adjusted gross margin was flat year-over-year at 64.7% last quarter, while Juniper’s adjusted gross margin fell 90 basis points to 58.3%.
Cisco’s market-leading margins suggest that its scale still gives it plenty of pricing power in the networking market. According to IDC, Cisco controlled 51.9% of the global Ethernet switch market in Q1 2020, as well as 36.3% of the combined market. service provider and the enterprise router market – making it the leader in both markets by a wide margin.
5. Increase in deferred revenue
Cisco’s deferred revenue, a key indicator of future demand, grew 11% annually to $20.4 billion. Within this total, its deferred product revenue increased by 17% and its deferred service revenue increased by 7%. These prepayments indicate that Cisco’s business is not headed for a cliff, even as its revenue and near-term profits decline.
6. Programs rewarding patient investors
Many tech companies arrested their redemptions or suspended their dividends to conserve liquidity throughout the COVID-19 crisis. But in fiscal 2020, which ended July 25, Cisco spent 59% of its free cash flow on $6 billion in dividends and $2.6 billion in buybacks.
It does not plan to discontinue either program and ended the quarter with $29.4 billion in cash, cash equivalents and investments, giving it plenty of room to increase its redemptions and dividends while acquiring more companies.
Additionally, Cisco’s forward yield of 3% and its low forward price-earnings ratio of 16 could set a floor under its stock until its core business recovers.
Cisco’s outlook for the first quarter was alarming, but it has already weathered many downturns. These six positives indicate that Cisco is not doomed, but its stock is unlikely to rebound until the headwinds subside and the company returns to generating only sustainable revenue growth.
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