Cisco Systems Inc. is engaged in developing a range of technologies related to networking, security, and cloud among many others. Its infrastructure platform comprises network technologies such as switching, wireless, and routing products that provide strong network capabilities, besides transporting and storing data.
Financial highlights of the latest quarter
The San Jose, CA-based company, which is considered a leader in the networking hardware and software, last week announced its financial results for the first quarter that were better than consensus expectations.
Cisco reported revenue of $11.9 billion for the three-month quarter that ended on October 24, representing a decline of 9 percent from the same quarter, a year earlier. If we analyze the sales performance of different categories, the company’s product sales declined 13 percent, while services sales rose 2 percent. Analysts polled by research firm Refinitiv were looking for sales of 11.85 billion.
Gross Margin was 63.6 percent in the quarter, just shy of 64.3 percent in the comparable period last year. On a GAAP basis, operating costs in the quarter rose 3 percent to $5.0 billion, representing 42 percent of the overall quarterly sales. On the other hand, operating costs decreased 7 percent to $4.0 billion on a non-GAAP basis, accounting for 33.1 percent of the total sales.
Earnings, on a GAAP basis, came in at $2.6 billion in the quarter, representing a decline of 28 percent on a year-over-year basis. Comparatively, non-GAAP operating profit fell 12 percent to $3.9 billion.
Cash flow from operational activities rose 14 percent to $4.1 billion in the first quarter, as compared to $3.6 billion in the comparable quarter last year.
CEO comments on Q1 performance
Speaking on the performance, Cisco’s Chief Executive Officer Chuck Robbins said in a statement that the company has started its fiscal 2021 with a strong start and the management is encouraged by the improving business situation.
Chuck added that “our focus is on winning with a differentiated innovative portfolio, long-term growth and being a trusted technology partner offering choice and flexibility to our customers. We see many great opportunities ahead as every company in every industry is accelerating its digital-first strategy.”
Cisco’s infrastructure platforms unit accounted for more than 50 percent of its overall revenue in the quarter. The unit is responsible for manufacturing and selling router and switches among other networking hardware products.
However, the aforesaid segment has struggled in recent months to boost sales due to multiple reasons such as increasing competition, loss of Chinese contracts, and disruptions due to the Covid-19 pandemic.
The company is still a leading manufacturer of routers and switches, but its market share is gradually declining as more companies are entering the industry. It is facing tough completion from China-based Huawei, HPE, Arista Networks, and Juniper.
On the positive side, demand for Cisco’s Meraki cloud-based platforms, Cat 9K switches, and WiFi 6 products remained strong in the quarter, but could not make up for the weak sales of older networking items, which was the main reason the company’s infrastructure revenue fell 16 percent on a year-over-year basis.
However, the company expects the sales to eventually recover as the pandemic ends and enterprise clients upgrade their networks to meet the increasing bandwidth requirements of 5G and cloud services.
Cisco’s applications segment has been growing at a tremendous pace. The segment’s video conferencing platform Webex was the main driver behind the overall growth of the unit. Meeting participants at Webex jumped more than two folds in the first quarter to get closer to the 600 million mark. The high growth was mainly attributed to the pandemic, as people were forced to stay home because of Covid-19, thus driving demand for online interaction platforms such as Webex. Rival Zoom Video Communications also greatly benefitted from the work-from-home trend.
Moreover, the company’s security segment also performed well in recent months. Cisco has strengthened it security business over the years with several acquisitions. Revenue from its security business jumped 6 percent in the latest quarter, mainly helped by double-digit growth at its cloud-based security platform Umbrella. The growth was a result of more demand from enterprises, as they needed cloud-based security services for their employees working from home.
Several analysts covered Cisco’s stock recently. Street Research upgraded the stock from “Neutral” to “Buy”, and issued a price target of $60, after convincing first-quarter results, improved margins, and positive outlook. Separately, analyst James Fish at Piper Sandler also raised the price target for CSCO stock to $45 per share from $44 per share, while maintaining a “Neutral” rating.
Moreover, Jim Suva at Citi Research was impressed by the company’s financial outlook and increasing optimism. Suva maintained a “Neutral” rating with a price target of $45 per share.
Overall, most of the analysts that cover Cisco have a positive rating on the stock. Out of 27 analysts, 14 have a “Buy” rating and 13 have a “Hold” rating for the stock. The average price target for the stock is $48.35.
Cisco stock’s performance
Cisco shares stayed traded relatively flat in the current fiscal year, mainly due to the negative effects of Covid-19 on its operations. If we look at the stock’s recent performance, it has slipped more than 14 percent so far this year.
Cisco’s 5G plans
Cisco has launched several initiatives this year related to 5G and the Internet of Things (IoT). The initiatives mainly include updating its product portfolio related to optics and software. Being an established player in the network solutions, Cisco is poised to capitalize from large-scale 5G deployment.
The company is also collaborating with AT&T for introducing 5G solutions to meet the increasing needs of customers. Analysts believe that Cisco can get a significant revenue boost from 5G wireless upgrades in the coming years.
The company has made few acquisitions in the past to support its expansion in emerging areas. For instance, it acquired Acacia Communications to further strengthen its networking solutions. The acquisition will also help the company in its 5G ventures, as Acacia specializes in designing high-speed optical devices that will be required by mobile operators across the globe to handle the data on 5G.