Cisco Q2 Results Show Resilience Despite Challenging External Environment
Cisco reported fiscal second-quarter results that beat analysts’ estimates on Wednesday, but investors were not impressed with the company’s continuing revenue declines, and the stock is now trading down around 4% after hours.
Here are the key numbers:
- Earnings: 77 cents per share, excluding certain items, vs. 76 cents per share as expected by analysts, according to Refinitiv.
- Revenue: $12.01 billion, vs. $11.98 billion as expected by analysts, according to Refinitiv. That’s down 4% from last year.
Read the news update from CNBC.
Analyst Take: Despite hitting on both revenue and earnings, the street met the results with a bit of a down tick. This goes to show that how companies work isn’t always the driver of the market. Given Cisco’s recent track record of meeting guidance and providing dependable forward looking guidance, the dip following a solid quarter performance somewhat reiterate the unscientific nature of the stock market. Having said that, there were some areas that could have given pause to investors. Items such as YoY revenue contraction, the erratic trade situation with China, the continued outbreak of Coronavirus and order slow downs that are tied to Brexit. Additionally, product orders are down in most categories, albeit by only single digits. CEO Chuck Robbins has reiterated in the past few earnings calls the volatile nature of China and how it has impacted the business. He has also pointed to elongated sales cycles that are impacting the top and bottom line.
Essentially, there was a balance of question marks for Cisco’s future that may have made a few investors wary. However, with only 5% growth over the past year, whereas the S&P is sitting at 22%. I think Cisco as a maturing technology company faces investor headwinds as the operation is more stable– This can be seen with other stocks like IBM, Dell and HPE, which face similar reactions from investors around earnings time.
Cisco Seeing Growth In important Areas
For this quarter, there was some notable growth in security and services. Services has always been a sweet spot and security spending has a tailwind as companies continue to place bigger investments in protecting important data. One of the most encouraging growth points for Cisco this quarter was the growth in recurring software sales. The number has now reached 72% of software revenue being recurring, which is a strong pivot from the legacy perpetual license model that Cisco long embraced. This model will drive more revenue continuity and margin growth for Cisco. It is also representative of how many companies prefer to consume IT.
With Unified Communications (Cisco Collaboration) being one of the largest components to the recurring revenue software business. Based on recently attending the Cisco Collaboration Analyst Summit, I expect this to pickup in the wake of Webex One platform benefitting from a few more quarters to mature. The company has finally reached a point where many of its collaboration (UC) solutions are being integrated into a single platform. This should enable stronger competition with the likes of Zoom, Ring Central, 8×8 and Microsoft in this space.
5G Important Going Forward
Despite today’s news of Mobile World Congress being cancelled for 2020, Cisco did have a big announcement late in 2019 around the Internet of the Future. Cisco has a budding business in Silicon with its SiliconONE offering that received an early vote of confidence from service providers and OTT Cloud companies. While it is too soon to make a call on revenue for the product, Cisco has a chance to make significant inroads as 5G proliferates with SiliconONE. This is something investors should keep an eye on as the network itself will need to be overhauled to handle the scale and flexibility of the next wave of applications and cloud services.
Going Forward Things Look a Little Soft, As Do Orders
Based on the various macroeconomic challenges, it shouldn’t surprise anyone that the guidance for Q3 was conservative. Robbins prepared the market for a slight dip in revenue, margin and earnings for the next quarter. The company had a similar cautious approach last quarter, which turned out to be close to the actual numbers. If significant positive progress is made with the Coronavirus outbreak, it would be feasible for some acceleration with the company’s revenues in China.
The small bump to the dividend should make some investors happy as it provides another growth vehicle besides price appreciation.
The softness in product orders were also noted on the call and should be something that the markets pay attention to. While a lot of attention to Asia and Brexit have been paid, the softest geography was the US. This likely is tied to the prolonged sales cycles mentioned on the call, but soft orders are an indicator going forward and Cisco will want to push for growth. Additionally, two big Cisco segments, Enterprise and Service Provider also look soft. As mentioned above, I do see some potential upside for the SP business as 5G accelerates. Enterprise will need to up its sales efforts over the next two quarters as that segment is a strong indicator of the overall business.
Overall Impressions of Cisco Q2 Earnings
The quarter for Cisco was both steady and solid as it delivered on par with expectations. The growth in subscription services was encouraging as that will be important to the company in the long run. This quarter, I recommend keeping a close eye on the macro-environment– Especially challenges with China including trade and most importantly Coronavirus. This could be a significant factor in terms of how things turn out for Cisco when the company reports its 3rd Quarter results in May.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
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