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Cisco: Blowing Past Expectations

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Introduction

I person only precocious bought a mini position successful Cisco Systems, Inc. (NASDAQ:CSCO) for my individual portfolio, arsenic I felt for illustration this dot-com bubble darling is being importantly underestimated pinch nan institution softly transforming nan business successful bid to solidify its gross stream. In summation to this, I judge Cisco mightiness beryllium entering a caller play of maturation driven by accrued connectivity demand, 5G, and unreality computing growth.

The history of nan institution seems to beryllium a dense load and a resistance connected nan stock price. Cisco erstwhile was nan largest institution successful nan world and 1 of nan starring stocks during nan dot-com bubble hype. It achieved a apical stock value of supra $78 per share, which is simply a staggering 50% higher compared to nan existent stock price, and no, location has been nary banal split. This institution really saw a 50% higher share value backmost successful 2000 compared to today. This is nan dense load I americium talking about. Being nan institution that delivered antagonistic returns complete nan past 2 decades does not peculiarly pull galore investors, surely not individual investors. Cisco Systems is nary hyped maturation banal coming and does not show a futuristic story. Does this, then, make it a bad finance today?

The only point I person to opportunity astir this is that nan profits of your investments coming dishonesty successful nan early capacity of nan institution and not successful nan past. I americium not saying this institution is cleanable extracurricular of its stock value performance, though. Cisco has known a number of bad years and maturation has been beautiful overmuch dormant for galore years, explaining nan specified 10% summation successful stock value complete nan past 5 years. The operation of circumstances has made investors skeptical astir nan communications giant.

On that note, let’s commencement focusing connected existent capacity and early maturation opportunities and expectations. Cisco released its fiscal Q2 2023 quarterly results yesterday and managed to amaze investors, aliases astatine slightest amazed me. Comments made nether nan net merchandise news article beautiful overmuch show nan communicative of this company’s capacity complete nan past mates of years and nan measurement investors spot it.

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Comment (Seeking Alpha)

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Comment (Seeking Alpha)

While nan hit itself was not overly impressive, nan double hit was still solid. Cisco managed to hit nan EPS statement by $0.02 and gross statement by $190 million. Solid, but nary fireworks here. The existent astonishment and “fireworks” were successful nan company’s guidance for nan adjacent 4th (3Q23) and its FY23 updated expectations. Both came successful importantly higher compared to nan statement anterior to nan net merchandise and show awesome maturation rates for Cisco to beryllium expected.

The merchandise of nan quarterly results seemed for illustration an fantabulous infinitesimal for maine to commencement my sum of Cisco Systems. Therefore, wrong this article, I will return you done nan institution fundamentals and offerings, quarterly financials, outlook, valuation, and risks.

So, without further ado, let’s get to it!

Cisco Systems

Cisco Systems, Inc. is simply a multinational exertion institution based successful San Jose, California. The institution designs, manufactures, and sells networking hardware, telecommunications equipment, and different high-tech products and services. Cisco's merchandise portfolio includes routers, switches, firewalls, wireless entree points, cloud-based collaboration tools, and overmuch more.

Cisco is known for its endeavor networking products, which supply nan backbone for galore firm and authorities organizations astir nan world. The institution has besides expanded its merchandise offerings successful caller years to see cybersecurity solutions, cloud-based services, and software-defined networking solutions.

Founded successful 1984, Cisco has grown to go 1 of nan world's largest exertion companies, pinch operations successful complete 100 countries and a workforce of complete 80,000 employees.

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Cisco gross maturation (Statista)

The institution has seen its revenues almost double complete nan past 17 years to a full of $51.6 cardinal for its fiscal FY22. Despite this important summation successful gross complete nan past 17 years, nan image complete nan past 10 years is not truthful positive, arsenic Cisco has grown its gross by a very disappointing 6% since 2013 erstwhile gross was $48.61 billion. This underperformance was driven by a number of factors for illustration nan nonaccomplishment of marketplace share, marketplace saturation, and a number of grounded ample acquisitions. In summation to this, Cisco has been shifting its attraction from hardware-based solutions to package and services. While this has been a basal move to accommodate to changing customer needs and marketplace conditions, it has besides led to a modulation from one-time hardware income to subscription-based package and work offerings.

While nan modulation to a subscription-based business exemplary has not helped nan institution to turn gross meaningfully complete nan past respective years, I do deliberation this to beryllium an fantabulous move by nan institution to solidify its gross watercourse and summation customer loyalty. A customer is little apt to move its hardware to different supplier erstwhile nan institution has a statement and long-time narration pinch Cisco. A subscription-based exemplary tin besides supply much elasticity successful nan pricing and packaging of products and services. This tin thief Cisco tailor its offerings to circumstantial customer needs and perchance summation income by making its products and services much affordable.

So, overall, I americium enthusiastic astir this modulation Cisco Systems, Inc. is making. Still, this unsocial is not going to meaningfully thrust gross and EPS maturation complete nan adjacent decade. So, what is?

There are respective fast-growing and promising industries/markets nan institution is exposed to, which could thrust gross maturation for Cisco. The first 1 of these secular maturation industries is cybersecurity. Cybersecurity is an important interest for businesses each astir nan world, and nan threat scenery is perpetually evolving. Cisco's attraction connected cybersecurity tin thief nan institution seizure caller opportunities successful this increasing market. The world cybersecurity manufacture was weighted astatine $203 cardinal successful 2022 and is expected to turn astatine a 12.3% CAGR until 2030. By offering a broad scope of cybersecurity solutions, including software-defined security, threat discovery and response, and personality and entree management, Cisco tin thief customers protect their networks, data, and applications. Through decades of expertise successful connection networks, Cisco is well-positioned to use from nan request for web information and is among nan starring information providers.

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Cisco's offering (Cisco)

Cisco held a 9.1% marketplace stock successful nan cybersecurity manufacture backmost successful 2020, according to nan chart shown below. This had grown from 8.7% successful 2017 but was down from 10% successful 2019. According to Canalys, Cisco held a 6.9% marketplace stock successful nan cybersecurity market, making it nan 2nd largest, only down Palo Alto Networks (PANW). The manufacture is highly competitory and still fragmented, but nan beardown existent position of Cisco should make it a beneficiary of wide manufacture growth.

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Cybersecurity marketplace divided (Statista)

The 2nd maturation driver I spot for Cisco is nan continued modulation to the cloud. The displacement to unreality computing has been a awesome inclination successful nan exertion manufacture complete nan past decade, and Cisco has been expanding its beingness successful this market. By partnering pinch awesome unreality providers for illustration AWS (AMZN), Microsoft Azure (MSFT), and Google Cloud (GOOGL), Cisco tin connection customers much options for connecting their on-premises information centers to nan cloud.

Again, Cisco’s expertise successful connectivity positions it well, but it has been quickly losing marketplace stock to competitors for illustration Juniper Networks (JNPR) and Arista Networks (ANET). While Cisco is said to still predominate nan wide information halfway connectivity market, its marketplace stock has been declining. In 2020, nan institution still held a marketplace stock of 40.6%, but by nan extremity of 2021, this had already dropped to 38.1%.

Still, Cisco holds a important position and pinch nan modulation to nan unreality expected to stay beardown complete nan adjacent decade, I expect Cisco to benefit.

The 3rd and last maturation driver that I would for illustration to talk successful this article is nan maturation of nan IoT (Internet of Things) industry. IoT is simply a quickly increasing manufacture and offers awesome maturation imaginable for Cisco arsenic well. Cisco's IoT portfolio includes solutions for connecting, managing, and securing IoT devices and data, arsenic good arsenic analytics devices for gaining insights from IoT data. As nan number of connected devices continues to turn and nan request for IoT solutions increases, Cisco is well-positioned to use from this trend. According to Fortune Business Insights, nan IoT marketplace should turn astatine a CAGR of 26.4% until 2029 and will scope a marketplace size of $2.4 trillion.

Edge networking, a important portion of some datacenters and IoT, will spot moreover higher maturation rates according to Vantage Market Research. This peculiar marketplace is expected to turn astatine a 38.2% CAGR until 2028 to scope a marketplace size of $49.8 billion. Cisco is still nan clear leader connected this front, but is seeing accrued title and truthful will person to enactment connected its toes.

Cisco Ranked #1 successful Market Share for Industrial Networking - Cisco Blogs

Cisco

While Cisco has vulnerability to galore much markets than discussed above, I judge these 3 connection nan champion maturation prospects. Of course, these industries beryllium of galore services and components not made aliases offered by Cisco, truthful these should not beryllium interpreted arsenic a full addressable market, aliases TAM, for nan company. I americium simply trying to exemplify nan maturation imaginable and vulnerability of Cisco that is often overlooked. Management has a decent institution successful manus but will request to enactment crisp and connected its toes to enactment up of nan title aliases regain technological activity wherever it has mislaid it.

On that note, let’s spot really nan institution did complete nan latest quarter.

Quarterly review

Cisco delivered a very decent quarter which hit some its ain estimates and those of Wall Street analysts. The superior logic for nan outperformance was nan improved readiness of nan proviso concatenation which is improving faster than anticipated. As a result, nan institution reported gross of $13.6 billion, which was an summation of 7% YoY. If we zoom successful a spot much connected nan reported gross numbers, we tin spot that full merchandise gross was $10.2 cardinal and was up 9% YoY. It was work gross that saw slower maturation rates of conscionable 2% while reporting full gross of $3.4 billion.

Cisco is seeing coagulated gross maturation arsenic a consequence of continued request by its customers. The integer translator crossed industries is still very overmuch ongoing, and caller groundbreaking technologies for illustration AI, ML, and IoT are driving maturation for Cisco, as illustrated below by nan CEO:

We are besides seeing galore customers moving up pinch their hybrid work, AI and ML investments while building nan modern infrastructure they request to present connected their objectives. IoT has besides been accelerating. We saw grounds gross maturation successful Q2 arsenic customers look to link their business systems successful bid to optimize powerfulness consumption, automation and efficiency.

Cybersecurity and unreality proceed to beryllium attraction areas for nan company, and Cisco is expanding its investments successful this area, arsenic discussed during nan Q2 net call:

We are expanding our investments successful our unreality guidance platforms that present nan simplicity our customers need. You will spot america proceed to bring AI and ML into those platforms to further simplify really networks are managed. For example, successful Q2, we announced respective caller innovations crossed our unreality managed networking and information portfolios that connection greater visibility pinch AI-driven insights, alteration unafraid connectivity, and springiness our customers nan expertise to simplify their IT operations.

We besides introduced caller flexible, much powerful and energy-efficient servers, which not only thief little cost, but besides thief our customers meet their sustainability goals, an progressively captious area for astir of our customers.

Breaking down revenues moreover further, we tin spot that merchandise gross maturation was driven by nan Secure, Agile Networks conception which grew by 14% YoY while accounting for nan largest portion of merchandise gross by a acold margin. Revenue for this conception came successful astatine $6.75 billion. Growth for nan conception was driven by beardown Switching gross but was partially offset by datacenter switching which declined slightly. Enterprise routing did turn by double digits.

The Internet of nan Future segment, nan 2nd largest merchandise segment, saw gross alteration by 1% which was driven by some optical and separator merchandise sales. The Collaboration merchandise conception saw a alteration of 10% YoY owed to falling request for gathering and collaboration devices. End-to-End information was up by 7% YoY driven by precocious request for zero spot and threat guidance solutions.

The institution saw beardown capacity successful ARR (Annual Recurring Revenue) maturation arsenic this now totaled $23.3 cardinal and grew by 6% YoY, pinch 11% maturation for its merchandise ARR. Software gross accrued by 10% while package subscription gross grew by a faster 15%. The modulation of nan business exemplary seems to beryllium processing well.

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Cisco

Total subscription gross reached $6 billion, an summation of 9%, and now represented 44% of revenue. RPO was $31.8 cardinal and accrued by 4% which was driven by a 7% summation successful merchandise RPO.

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RPO (Cisco)

The gross separator for nan 4th besides came successful higher than anticipated arsenic this was 63.9%, up 90 ground points sequentially.

While nan financial capacity of nan institution was very strong, this was not nan lawsuit for orders. Total merchandise orders were down 22% YoY, though this did comparison to its strongest ever bid intake successful nan twelvemonth earlier erstwhile it accrued by 34%. Still, this twelvemonth nan institution saw a diminution successful orders crossed each geographies. One affirmative constituent is that sequential maturation was successful statement pinch humanities averages and cancellations rates stay beneath pre-covid levels. Strong margins for Cisco resulted successful a nett income of a grounds $3.6 cardinal which resulted successful a grounds EPS of $0.88. Profitability is nary problem for Cisco astatine all.

The backlog for Cisco was up YoY, but down 6% sequentially which is not ideal. With proviso issues fading, nan institution could beryllium picking up its maturation way complete nan adjacent mates of quarters but will astir apt pain done its backlog astatine a accelerated pace. Also, respective Wall Street analysts constituent to nan backlog arsenic thing to interest astir complete nan adjacent respective quarters. Cisco did not mention an nonstop number, truthful it is each astir guessing conscionable really large nan backlog really is. Jefferies expert George Notter estimated that Cisco presently holds a backlog of astir $14 billion.

Raymond James expert Simon Leopold said nan following aft nan net release:

Order declines and reductions successful backlog are portion of normalization and should beryllium expected, but provender immoderate bearish arguments," Leopold wrote. "We spot nan package displacement and separator betterment favorably, and nan upward revisions warrant banal appreciation.

Balance expanse & Dividend

Cisco ended nan 2nd 4th of its fiscal year, ending December 31, pinch a full rate position of $22.1 cardinal arsenic it saw a grounds operating rate travel of $4.7 billion, up 93% YoY. Cisco holds a very coagulated nett rate position which gives them a batch of state to put successful nan business aliases look for M&A opportunities.

Another action to make bully usage of nan rate is to return a portion of it to shareholders successful nan shape of dividends and stock buybacks. During nan latest quarter, nan institution returned $2.8 cardinal to shareholders. This consisted of $1.6 cardinal successful dividend payments and $1.3 cardinal successful stock buybacks. Management still had $13.4 cardinal remaining to repurchase further shares complete nan adjacent years.

Cisco besides accrued its dividend by $0.01 (3% increase) to $0.39 per stock and this marks nan 13th consecutive summation of nan dividend. Management remains committed to returning 50% of free rate travel to shareholders annually. Cisco now has a guardant dividend output of 3.22% which I deliberation is very decent for a exertion company. Also, pinch a payout ratio of beneath 45%, nan dividend looks comparatively safe, and mixed pinch maturation prospects complete nan adjacent respective years, we should spot nan dividend turn betwixt 4-8% annually. The existent 5-year maturation complaint is 5.55%.

The coagulated dividend output successful operation pinch a debased payout and accordant increases results successful a very beardown dividend standing from Seeking Alpha arsenic shown below. The institution mightiness not beryllium nan dream for either dividend income investors aliases dividend maturation investors, but I deliberation that overall, nan dividend is simply a very bully other erstwhile owning this communications giant.

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Seeking Alpha

Outlook & Valuation

While nan financial results were very decent, these successful themselves were nary logic for Cisco Systems, Inc. banal to climb adjacent to 6% astatine nan clip of penning (the adjacent trading day). It was nan very awesome outlook fixed disconnected by guidance that caused enthusiasm among investors. Management expects gross to turn betwixt 11% and 13% YoY for 3Q23, compared to nan statement of beneath 6% growth. The gross separator is expected to beryllium betwixt 63.5% and 64.5% pinch EPS expected to beryllium successful nan scope of $0.96 to $0.98. This compares favorably to a statement anterior to nan net merchandise of $0.89 successful EPS.

And nan nosy did not moreover extremity present arsenic guidance besides meaningfully accrued its FY23 outlook. It now expects gross maturation of betwixt 9% and 10.5% (prior guidance of 4.5%-6.5% vs. 5.72% consensus) pinch EPS of $3.73 to $3.78 (from anterior guidance of $3.51-$3.58 vs $3.55 consensus). This intends that Cisco expects some apical and bottom-line maturation to travel successful importantly higher than antecedently expected. The superior logic for this outperformance seems to beryllium nan faster betterment of nan proviso concatenation which increases nan output from Cisco and allows nan institution to use from its beardown RPO and backlog. The caller guidance will require analysts to besides importantly summation their estimates which past will bring down nan valuation of nan company. This explains nan 6% jump successful stock price, and it looks wholly justified.

Management confirmed that they support a adjacent oculus connected nan macroeconomic conditions arsenic these stay treacherous, but they besides spot that wide request remains dependable and connected par pinch nan first quarter. Management added nan following:

Looking astatine nan broader landscape, integer translator and hybrid unreality stay apical areas of spend, which is fueling maturation crossed our portfolio. Many customers person told maine that while their walk levels whitethorn beryllium slowing successful immoderate areas, exertion remains basal arsenic it is captious to their wide business resilience, competitory differentiation and success.

So, what does nan existent expert guidance look for illustration now? Analysts now guideline for 3Q23 EPS of $0.97 and successful statement pinch nan midpoint of guidance from Cisco itself. Revenue is expected to travel successful astatine $14.40 cardinal and shows a maturation complaint of 12.2%.

The upbeat guidance from Cisco has besides impacted FY23 guidance by analysts arsenic they now constituent to an 11.7% maturation successful EPS and gross maturation of adjacent to 10%. For nan years that follow, analysts judge maturation will revert backmost to 5% connected mean for EPS and gross maturation of astir 3%.

Honestly, I judge that nan existent statement for nan adjacent mates of years is somewhat excessively debased arsenic I expect nan institution to study person to 5% gross maturation and 7% EPS maturation for nan years until 2026. I judge nan institution will spot beardown request for its products erstwhile request reaccelerates successful nan play 2024-2026. Cybersecurity and IoT maturation will beryllium significant, and I deliberation Cisco will beryllium a beneficiary if it is capable to return a measurement up against nan competition.

As a consequence of my expectations, I americium consenting to grant this communications elephantine a P/E of 15x. If we presume nan institution to, indeed, study EPS of 3.75 for FY23, and turn EPS by 7% successful FY24, this results successful FY24 non-GAAP EPS of $4.01. Based connected a 15x P/E ratio we extremity up pinch a value target of $60.15 per stock aliases 16% upside potential.

As for comparison, Wall Street analysts presently clasp a bargain standing connected nan institution pinch a target value of $55.82 per share, leaving investors pinch an 8% upside imaginable from its existent stock price.

Risks

An finance successful Cisco Systems, Inc. is, for illustration immoderate different investment, not without risks. While nan institution looks to beryllium comparatively unchangeable and nan caller business exemplary increases rate travel predictability, location are still immoderate risks to beryllium alert of erstwhile you are considering investing successful Cisco.

One of these risks is nan threat of a much superior economical slowdown. While ostentation is coming down rather steadily and economical information remains resilient, we could still extremity up successful a mild recession by nan 2nd half of 2023. Wall Street analysts stay divided connected this taxable arsenic immoderate judge we will spot a recession successful nan U.S., while others judge a soft landing is now nan astir apt scenario. I judge we will so spot a soft landing and debar a recession successful some nan U.S. and Europe. While economical information mightiness deteriorate a spot further complete nan adjacent 6 months, I expect this to amended by nan 2nd half of nan year.

If against my expectations we would extremity up successful a recession, this will astir apt effect request for Cisco’s products resulting successful cancellations successful nan backlog together pinch Cisco burning done its backlog moreover faster, which will chiefly effect nan gross maturation outlook for nan pursuing years.

Another consequence that is important to see is nan consequence of Cisco losing further marketplace stock to competitors. Cisco has been losing marketplace stock complete nan past mates of years to competitors specified arsenic Arista Networks, Juniper Networks, and a full load of start-up cybersecurity companies. To execute nan maturation rates discussed above, it will beryllium important for Cisco to clasp onto its existent marketplace stock successful captious maturation markets for illustration cloud, IoT, and cybersecurity. The title looks tough, but Cisco decidedly has nan financial resources to conflict disconnected these competitors and moreover get immoderate of them to grow its portfolio and method knowledge.

Conclusion

Cisco Systems, Inc. delivered coagulated results for its 2Q23 and impressed pinch its outlook for 3Q23 and FY23, which were importantly supra nan statement estimates. Management continues to displacement nan business to a subscription-based business exemplary which should consequence successful much predictable rate flows, a amended knowing of customer needs, and accrued customer loyalty. I judge this is simply a awesome move by guidance and I deliberation this will salary disconnected complete nan adjacent decade.

In summation to this, nan institution is exposed to respective maturation drivers that should origin patient maturation complete nan adjacent respective years of betwixt 3% to 6%. Based connected my estimates for FY24 EPS and a P/E of 15x, I cipher a target value of $60.15 which leaves america pinch a 16% upside imaginable from nan existent stock price.

The operation of coagulated and predictable gross maturation and decent superior returns successful nan shape of some dividend and stock buybacks brings maine to nan conclusion that Cisco is simply a bargain beneath a stock value of $53.

I, therefore, complaint Cisco Systems, Inc. a bargain astatine a existent stock value of $51.65.

This article was written by

Daan Rijnberk floor plan picture

Long word oriented investor focused connected uncovering nan champion finance opportunities connected some European and US banal markets.I talk a wide scope of companies and industries including both maturation and worth to guarantee a good diversified portfolio. My attraction will not beryllium connected speedy gains, but connected semipermanent financial growth. My strategy is to buy-and-hold for arsenic agelong arsenic my finance thesis is intact. Therefore, I effort to update each finance idea/stock each 3-6 months to support my standing and thesis up-to-date.I constitute exclusively connected Seeking Alpha.

Disclosure: I/we person a beneficial agelong position successful nan shares of CSCO either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

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