When will Cisco (CSCO) finally turn the corner? As with the rest of the tech sector, the company has been punished over the past six months, losing some 30% of its value. The tech giant produces high quality network equipment that its customers rely on, but investors aren’t so sure that reliance is worth the current stock price.
The company continues to shift its business model more towards software and applications, particularly those services that generate high recurring revenues.Cisco is 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. However, the transition has been volatile, and investors are questioning when will the shift begin to bear fruit.
The tech giant is set to report fourth quarter fiscal 2022 earnings results after the closing bell Wednesday. Management believes that by 2025, Cisco’s subscription revenue will account for 50% of total revenue, which would be a six percentage points increase (from 44%) in fiscal 2021. In the meantime, while Cisco generates significant free cash flow, in addition to an attractive yield of almost 3%, the company's revenue growth, particularly over the past few years, hasn’t been strong enough to entice investors to be patient.
During that span, however, Cisco’s strong cash flow has allowed the business to return excess cash to shareholders in the form of buybacks. In the first nine months of this current fiscal year, about $10 billion has been returned to shareholders. The company’s business is healthy enough to withstand the revenue drought. But for any of that to matter, the company on Wednesday must show consistent growth in its pivot towards software and subscription businesses as it scales down their legacy hardware segments.
In the three months that ended June, Wall Street expects Cisco to earn 82 cents per share on revenue of $12.78 billion. This compares to the year-ago quarter when earnings came to 84 cents per share on revenue of $13.13 billion. For the full year, earnings are projected to rise 4.03% year over year to $3.35 per share, while full-year revenue of $51.18 billion would rise about 2.7% year over year.
Given the recent rise in inflation, interest rates and supply chain disruptions, Cisco deserves some credit for navigating this environment in the manner that it has. As such, an argument can be made that Cisco stock does not accurately reflect the qualities of the company and its leadership. What’s more, the company remains in a strong position to benefit from rising demand for digital networks for both educational and business needs.
Increased demand not only for Cisco’s infrastructure and networking services, but also for cloud computing and telecom networks services will be key drivers of Cisco’s growth in the quarters ahead. In the third quarter, the company reported earnings of 87 cents per share which beat analyst estimates by a penny, though revenue of $12.84 billion missed by $500 million. The company noted that revenue during in the quarter had been adversely impacted from "Covid lockdowns in China and the war in Ukraine.”
The company didn’t expect things to get much better, lowering its full-year earnings forecast to between $3.29 and $3.37 per share, down from a previous outlook of $3.41 to $3.46. Analysts had expected the company to earn $3.44. Likewise, full-year revenue was revised lower to a new range of 2% and 3% growth, down from a previous growth estimates of 5.5% to 6.5%. The stock immediately plunged more than 13% on the downbeat outlook.
On Wednesday the market will want to see whether Cisco can improve on these metrics before taking a long-term 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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