What will it take to get Cisco (CSCO) stock to move higher? Unlike smaller competitors such as Zoom Video (ZM) and Zscaler (ZS), which have surged amid the massive shift towards work-from-home, Cisco stock, which has fallen 1% over the past year, has been largely ignored. Are the shares undervalued or merely misunderstood?
These are some of the key questions investors will look to answer when the networking giant reports second quarter fiscal 2021 earnings results after the closing bell Tuesday. The reason for the decline in Cisco shares has been due to the company’s cyclical nature where, depending on the timing of its many acquisitions and/or divestitures, Cisco’s revenues has fluctuated up or down. Cisco continues to transition its business more towards software and subscription offerings, while scaling back its legacy routing and switching businesses.
To be sure, the routing and switching businesses, which consists of sales of devices that are the backbone of the internet, still deliver strong cash flow for the company, despite the meager growth numbers. This business segment still accounts for some 75% of Cisco’s product revenue in the last fiscal year, while accounting for 55% of total revenue. That said, investors -- for that matter the overall market -- have been frustrated by the fact that Cisco’s quarterly revenue has fallen for four straight quarters.
But there’s good news on the horizon. Analysts forecast Cisco’s revenue to return to growth in the company’s fiscal Q3. Cisco has touted the effectiveness of its WebEx video conference service, albeit a small part of the business, as rising to the demand of consumers during the pandemic. Cisco has produced double-digit revenue growth from Webex due to the increase in demand for remote work. Investors on Tuesday will want assurances that Cisco can pivot quickly enough to offset the declines in its legacy businesses.
In the three months that ended January, Wall Street expects Cisco to earn 75 cents per share on revenue of $11.92 billion. This compares to the year-ago quarter when earnings came to 77 cents per share on revenue of $12.01 billion. For the full year, ending June, earnings are projected to decline 2% year over year to $3.17 per share, while full-year revenue of $48.84 billion would decline 1.6% year over year.
As noted, there is optimism that Cisco show revenue growth in its fiscal Q3 report. Part of the reason is due to the growth in Internet traffic. Across many industries the market has witnessed increased spending on cybersecurity as employees work remotely amid social distancing norms. These trends have increased demands not only better network security, but also stronger web security as well as advanced threat solutions.
In the fiscal first quarter, though overall revenue fell 9% to $11.93 billion, Cisco’s Security posted strong gains to offset declines in platforms and applications. The rise in Security revenue helped Cisco deliver a beat on both the top and bottom lines and deliver upside Q2 guidance. Combined with the 10% year-over-year growth in software offerings and subscriptions, it seems Cisco’s business transformation is on schedule. On Tuesday investors will want to see continued progress in these areas.
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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