Shares of Cisco (CSCO) have been in a nice uptrend, rising some 50% since last November, driven not only by the economic recovery, but also rising demand for infrastructure and networking services. The stock has risen more than 20% in six months and is up 26% year to date, besting the S&P 500 index in both spans. But can the outperformance continue?
The networking giant reports fourth quarter fiscal 2021 earnings results after the closing bell Wednesday. Investors want to know what will it take to keep Cisco stock moving higher. While the pandemic has indeed impacted Cisco’s business as it forced enterprise and commercial customers to either delay orders or suspend projects entirely, the company remains in a strong position to benefit from rising demand for digital networks for both educational and business needs.
What’s more, evidenced by recent acquisitions such as Israeli application monitoring company Epsagon for $500 million, Cisco continues to shift its business model more towards software and applications, particularly those services that generate high recurring revenues. This comes on the heels of of closing its acquisition of Socio Labs and its event technology platform. And thanks in part to its diligent cost controls, the company has amassed tons of financial firepower for more acquisitions or organic expansion.
While the company is certainly heading in the right direction, the pace of the transition from hardware to software still has more room to climb. And with the share priced still trading at such cheap valuation, combined with its strong dividend yield, now would be the time to take a long look at Cisco for the next 12 to 18 months. But for that to matter the company on Wednesday will want some assurances that Cisco can pivot quickly to new growth businesses to offset the revenue declines in the legacy segments.
In the three months that ended July, Wall Street expects Cisco to earn 82 cents per share on revenue of $13.02 billion. This compares to the year-ago quarter when earnings came to 80 cents per share on revenue of $12.15 billion. For the full year, earnings are projected to decline 0.7% year over year to $3.20 per share, while full-year revenue of $49.71 billion would rise about 0.8% year over year.
The pace of Cisco’s software transformation is key to its success as it continues to realize revenue declines in its legacy hardware segments, particularly the routing and switching businesses which are cyclical in nature. To be sure, these segments still deliver strong cash flow for the company, accounting for some 70% of Cisco’s product revenue in the last fiscal year. Heading into this quarter, there is tons of reason for optimism due not only to the growth in internet traffic, but from the increased spending on cybersecurity.
Cybersecurity has been a key growth area for Cisco, which has driven double-digit revenue growth in deferred revenue and higher levels of recurring revenue. In the third quarter consolidated revenues grew nearly 7% to $12.8 billion, demonstrating broad strength, while adjusted EPS rose 5% to 83 cents, beating on both measures. The 13% rise in security and 8% increase in Service revenue was a strong factor in the beat.
All told, Cisco’s growth in software and recurring revenue has begun to offset weaknesses in its legacy segments. On Wednesday, beyond a top and bottom line beat, investors will want strong upside guidance along with an accelerated pace of towards software.
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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