Cisco (CSCO) stock has declined 13% so far this year, including an 11% drop in the past thirty days, trailing the S&P 500 index in both spans. And when expanding that horizon by six months, the shares have lost almost 2% of their value, while the S&P 500 index has risen 1.5%.
Given the company’s strong dividend yield of 2.6%, Cisco now presents excellent value and strong defensive qualities ahead of the economy re-opening. The networking giant reports second quarter fiscal 2022 earnings results after the closing bell Wednesday. Investors want to know what it will take to keep Cisco stock moving higher. The company continues to shift its business model more towards software and applications, particularly those services that generate high recurring revenues.
Cisco management has been investing in ways to grow its recurring revenue from subscription-based software and services as it shifts away from its core business of selling network switches and routers. By 2025 the company said it it expects subscription revenue to account for 50% of total revenue, which would be a six percentage points increase (from 44%) in fiscal 2021. What’s more, the company remains in a strong position to benefit from rising demand for digital networks for both educational and business needs.
Investors anticipate increased demand not only for infrastructure and networking services, but also for cloud computing and telecom networks services which has become key drivers of Cisco’s growth over the past year. But for any of these catalysts to matter, the market will want Cisco on Wednesday to show that it can pivot quickly to new growth businesses and execute in a manner to offset the revenue declines in the legacy segments.
In the three months that ended January, Wall Street expects Cisco to earn 81 cents per share on revenue of $12.65 billion. This compares to the year-ago quarter when earnings came to 79 cents per share on revenue of $11.96 billion. For the full year, ending June, earnings are projected to rise 6.2% year over year to $3.42 per share, while full-year revenue of $52.7 billion would rise about 5.8% year over year.
What’s more, evidenced by recent acquisitions, Cisco continues to shift its business model more towards software and applications, particularly those services that generate high recurring revenues. The speed of Cisco’s software transformation is key to Cisco's success as it continues to realize revenue declines in its legacy hardware segments, particularly the routing and switching businesses which are cyclical in nature. As Cisco is shifting away from its core business the pace of the transition hasn’t been as fast as some investors would like.
It’s likely for this reason Cisco is now reportedly interested in making a deal for data analytics software specialist Splunk (SPLK). A takeover offer for Splunk could be worth more than $20 billion, according to The Wall Street Journal. Picking off Splunk would be Cisco’s biggest buyout ever, topping its 2005 deal for Scientific Atlanta which was worth $7 billion. Until any new deals are announced, Cisco will have to rely on organic growth which has been less-than stellar.
In the first quarter consolidated revenues grew 8.1% to $12.9 billion, but missed estimates by $90 million. Although Q1 EPS of 82 cents beat by 2 cents, adjusted gross margin fell to 64.5% from 65.8% because of increased costs. As did product gross margin and service gross margin. On Wednesday the market will want to see whether Cisco can improve on these metrics before taking a long look at the stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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