The News: Cisco stock fell 3% in extended trading on Tuesday after the company posted fiscal second-quarter earnings that showed enduring struggles in its top product segment. Still, the company’s results and quarterly guidance exceeded analysts’ estimates.
Here’s how the company did:
- Earnings: 79 cents per share, adjusted, vs. 76 cents per share as expected by analysts, according to Refinitiv.
- Revenue: $11.96 billion, vs. $11.92 billion as expected by analysts, according to Refinitiv.
Overall, Cisco’s revenue narrowed slightly on an annualized basis in the quarter, which ended on Jan. 23, according to a statement. Read the full news story on CNBC.
Analyst Take: Cisco had seen a strong rise in its share price heading into today’s earnings as the market was looking for further signs of recovery from the technology giant. Given its diverse business spanning networking, security, 5G, collaboration and a broad swath of enterprise IT, seeing continued growth in its fiscal Q2 was exactly what analysts and shareholders were hoping for. Cisco is a bell-weather for technology.
Cisco is also a great example of a portion of the tech sector that didn’t benefit enterprise wide from the pandemic the way certain tech companies did. With large swaths of Cisco’s business serving industries that were hardest hit by the pandemic, not to mention some challenging geopolitical and supply chain issues, there have been reasons to be concerned. However, Cisco has remained steadfast, and while overall growth on an annualized basis wasn’t in the cards for this quarter, the company was able to beat revenue and EPS estimates and provide guidance that has the potential to take the company to annualized growth by end of year.
In terms of the guidance going forward, the company came out with a more optimistic view for what is ahead targeting 3.5-5.5% revenue growth for its fiscal Q3. While this isn’t the double digit growth that some of the Covid “Tech” Stocks are seeing, this would be a nice steady uptick for the company. If Cisco again outperforms its guidance and is back into growth after a multi-quarter slide, it should give analysts and investors a reason to be encouraged about the companies prospects. With more stimulus looming, and increased mobility along with normalized supply chains, the long tail disruptions that have been challenging for Cisco should be subsiding over the next two quarters. Not to say we are back to normal, but more normal, which should present an opportunity for growth.
The Drivers of this Quarter’s Performance
As I mentioned above, this quarter had plenty of positives despite the lack of overall growth. Still, the external environment is tricky and for Cisco to reach the result it did, sound execution was very important. Keeping YoY revenue flat with the vast headwinds was a big accomplishment, but we also know the street wants growth and that will have to be a big focus for Chuck Robbins and his team as Cisco heads into the back half of the year. There were also continued mentioned on the earnings call of delayed revenues due to the economic and healthcare uncertainty. These delays are notable and an obvious impact to revenue, but the positive could be in a reversal that drives a faster than expected growth.
Some of the company’s earnings highlights for the fiscal 2nd quarter:
- Total product order growth of 1% year over year
- Product revenue strength across Catalyst 9000, Data Center Switching, Security, Wireless and Webex portfolios
- Great progress on business transformation to more software and subscription, with 76% of software revenue sold as a subscription
- Dividend increased 3%
Catalyst 9000, Data Center Switching, Security, Wireless, Webex
Security and services continue to be the biggest bright spots for Cisco. I weigh the company’s strength in the security portfolio as a big key during the pandemic, which has been a catalyst for mounting threats for enterprise and government customers. Cisco is well-positioned to provide the needed technology to counter this increase in cyberthreats and the 10% YoY growth reflects that the market shares my confidence.
Other areas where I believe Cisco is performing well is in Webex and its SD-WAN portfolio supporting the increased demand for remote work. This isn’t changing any time soon, and Cisco should continue to build strength in this category. It would be good to get a better readout on the growth of Cisco Webex as there was a mention of double digit growth for Webex in particular, but since it sits in the Applications portfolio, which was flat YoY and down for the year, a little bit of the progress for Webex may get buried in the broader segment.
Subscription as a Factor of Service and Software Revenue.
A final note of encouragement for this quarter comes in the company’s continued increase in moving from perpetual to subscription software revenue, which was the case for 76% of the company’s software business booked this quarter. This follows a 78% number from the previous quarter and shows continued momentum in this effort to transform perpetual software revenue to recurring. I see this as a sign of stability and buy-in from customers, and the recurring revenue is always a value multiplier for the business. I’m interested in watching Cisco expand and deepen its software bench in the coming quarters-This is something the market should keep an eye on to better understand long term value and growth opportunities.
Overall Impressions and a Look Ahead for Cisco
As mentioned, the guidance looks positive, and overall I feel that this quarter went as well as many could have hoped. I continue to profess that the OEM’s in tech have faced much more significant headwind than the pure cloud and software providers. This is more of a rotation and long-term value play than a short-term growth play.
Cisco benefits from diversity, a strong vision, and sound strategic leadership. Growth and stability are being driven by innovation and a shift from an aging hardware and attached services business model to a more “Cloudified” software, services, and recurring revenue model. I expect this to become more visible over the next 4-6 quarters as we see XaaS (everything as a service) continue to gain momentum in parallel to hybrid IT architecture. Cisco needs to present its capabilities in XaaS and consumption services sooner than later. I’m keeping a close eye on this as we see HPE, Dell, Lenovo and IBM all further defining their stories in this space.
In the end, growth is the name of the game, and in tech, it is weighed heavily among analysts, press, and consumers. All seeking to ride the momentum. I believe Cisco remains a staple for secure, well-built, and engineered IT that enables the world’s businesses and organizations large and small to function. There will be continued pressure as Cloud as SaaS persist, but Cisco will evolve with it, and the growth should return to normal as our world begins to do the same.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
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Image: Cisco
The original version of this article was first published on Futurum Research.
Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. From Big Data to IoT to Cloud Computing, Newman makes the connections between business, people and tech that are required for companies to benefit most from their technology projects, which leads to his ideas regularly being cited in CIO.Com, CIO Review and hundreds of other sites across the world. A 5x Best Selling Author including his most recent “Building Dragons: Digital Transformation in the Experience Economy,” Daniel is also a Forbes, Entrepreneur and Huffington Post Contributor. MBA and Graduate Adjunct Professor, Daniel Newman is a Chicago Native and his speaking takes him around the world each year as he shares his vision of the role technology will play in our future.