Cisco Systems Inc. (NGS: CSCO). Revenue in fiscal 1Q21 declined 9% year-over-year, while non-GAAP EPS dropped 10% annually.
Some investors have expressed concern that Cisco risks becoming the IBM of several years ago, when that company masked a multi-year stream of quarterly revenue declines with share buybacks that artificially lifted EPS.
As a financially strong company, Cisco may seek to acquire assets at discounted prices.
Long-time CFO Kelly Kramer indicated during the summer her intention to step away. She will be succeeded by R. Scott Herren, most recently CFO at Autodesk. We believe the executive transition will be smooth and uneventful.
Despite the sequential decline in sales and adjusted profits, Cisco improved non-GAAP gross margins year-over-year as the company steers away from its historical reliance on hardware sales. Cisco is continuing to transform its business through a rising contribution from software offering and subscriptions, while its growing service business provides a steadying trend in revenue that contributes to margin expansion.
As the company lessens its reliance on hardware and shifts more to software-based and software-defined set of architectures, revenues should stabilize while margins expand; and Cisco should see more benefits than challenges from what appear to be permanent shifts in the digital economy.
CEO Chuck Robbins noted that every company in every industry is accelerating its digital-first strategy, while compressing years of transformational work into just a few months. While shifting to a software and subscriptions model, Cisco is simultaneously focused on ‘building innovation that helps our customers and Cisco thrive in a hybrid cloud world.’
The CEO laid out key areas of focus to enable and accelerate these transformations. The first is delivering optimized application experiences, given that the application (software) is increasingly how customers and end users access products and consume services. Cisco will continue to deliver secure network capabilities as a service.
Another priority is aiding customers amid accelerating changes in their workspaces, reflecting hybrid work models and remotely distributed assets with varying connectivity and collaboration needs. Security remains paramount in environments with ever-shifting network access points and connected devices.
For the service provider vertical, Cisco is prioritizing helping carriers succeed in significant architectural transitions such as 400 Gb and 5G mobility. A final priority is developing edge technologies that allow application developers to run distributed applications while securely accessing and managing distributed data.
While compute functions continue to migrate to the cloud, companies continue to need robust, scalable, and secure on-premises network infrastructure for employees to communicate across wide area networks, large office, campus, and remote settings. Cisco for years successfully adapted to changes in on-premises technology infrastructure, but its business of providing on-premise gear slowed in mid-calendar 2020 as the pandemic worsened.
Pandemic-related constraints on revenue prompted large enterprise customers and particularly SME customers to constrain new network investments across spring and early summer. During a difficult fiscal 4Q20 (ended August 2020), total orders declined more than 10% year-over-year, including drops of 7% from enterprise customers and 23% from SME and channel customers.
The characteristics of this current phase of self-isolation – telecommuting, social networking, video streaming – are all directly impacting multiple end-markets served by Cisco. CEO Robbins noted areas of growth and recovery in the quarter, including ongoing success of the Catalyst 9000 family of switches, Meraki cloud-based platforms, and security demand overall. Software subscriptions represented more than three-quarters (78%) of total software sales, with this category growing in double-digits year-over-year.
Companies are prioritizing their limited spending to support remote operations and automation. Customers running applications across multiple clouds require next-generation architectures with automation, security and visibility-orchestration.
Cisco’s shift to more subscription-based software offerings aligns with customers’ pressing need for business agility. We believe Cisco remains well positioned over the long term to serve its customers and create differentiated solutions aligned to cloud, 5G, WiFi 6 and 400G optical.
Cisco’s market opportunity remains vast. Based on Cisco’s analysis of digital economy trends, connected devices will reach 29 billion, or three-times the global population, by 2023. IoT, or machine-to-machine interactions, are growing at a 30% CAGR and will represent tens of billions of end-points in coming years. Fixed broadband speeds will do.
Uble and mobile data speeds will at least triple by 2023. Cyberattacks including advanced DDoS attacks are spiking. All this calls for robust, automated, secure and highly visible networks spanning carrier core through aggregation, access, edge, and end-point devices. Cisco believes it is uniquely positioned to serve this explosive opportunity.
Long-time CFO Kelly Kramer indicated during the summer her intention to step away. She will be succeeded by R. Scott Herren, most recently CFO at Autodesk; his background in software aligns with Cisco’s strategic shift. We believe the executive transition will be smooth and uneventful.
As the pandemic begins to recede, the essential nature of Cisco’s connectivity offerings is likely to remain paramount, as the role of remote, off-site, and hybrid work increases.
EARNINGS & GROWTH ANALYSIS
Fiscal 1Q21 revenue was toward the high end of management’s implied guidance of $11.7-$12.0 billion, and above the $11.85 billion consensus forecast.
Non-GAAP EPS was above the high end of management’s $0.69-$0.71 guidance range and also above the $0.70 consensus call.
For fiscal 2Q21, Cisco guided for 0%-2% annual revenue decline, which would indicate revenue of $11.8-$12.0 billion. Cisco has historically topped EPS expectations by a few cents per quarter.
On November 13 at midday, BUY-rated CSCO traded at $41.24, down $2.58.