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Cisco Finishes Fiscal With Solid Results and Conservative Guidance
by Daniel Newman | August 12, 2020

The News:

Cisco shares fell about 6% in extended trading on Wednesday after the maker of computer networking equipment provided a disappointing forecast. CEO Chuck Robbins told analysts during a conference call on Wednesday that the company’s chief financial officer, Kelly Kramer, will be retiring.

Here’s how the company did in the fiscal fourth quarter:

  • Earnings: 80 cents per share, adjusted, vs. 74 cents per share as expected by analysts, according to Refinitiv.
  • Revenue: $12.15 billion, vs. $12.08 billion as expected by analysts, according to Refinitiv.

Revenue in the quarter declined 9% from a year earlier, according to a statement, the third straight quarterly drop. Earnings per share rose 22% as the company reduced operating expenses by 9%. Read the full news piece on CNBC

Analyst Take: In the wake of a non-stop set of resistance for the economy and many parts of the enterprise IT, Cisco was sure to be facing a challenge to deliver this quarter.

The results were good, and bad, but more good. The numbers beat the adjusted expectations. This has been thematic as expectations after Covid-19 halted the economy were set to more reasonable levels. However, nothing should be taken for granted with what is going on the world, and with Cisco being a huge supplier of infrastructure for enterprises, schools, government and more, the company had its work cut out for it. 

Cisco has also seen a wave of challenges in the past few quarters that were more invasive than many SaaS and Cloud plays. More like the chipmakers, the trade disputes with china were problematic, and so was the first 2 months of the year when supply chains were damaged by Covid-19 in China before it reached U.S. shores. This was essentially what Cisco dealt with for most of the calendar year. 

Some reprieve was found as investments in Cyber Security and Collaboration exploded after Covid-19 hit the economy hardest. This bode well for Cisco as its Collaboration and Security businesses both saw significant growth. In the quarter, security saw a 10% growth and Cisco is now the world’s largest IT security company. So that is a silver lining for sure.

Other parts of the business have seen more headwinds, most specifically the datacenter infrastructure business, which has suffered double-digit declines. I believe this part of the business will bounce back when the pandemic stabilizes enough for businesses, colleges and public sector employees to head back to work–and yes, there will be some changes in work and more remote work, but I think the company’s strong collaboration, SD-WAN and security business will all grow to offset the longer implications of the overly touted “New Normal.”

Overall Impressions of Cisco Q4 Earnings and a Look Ahead

The Big OEM’s like Cisco, Dell, HPE are all going to need to be looked at a little bit differently than the cloud and SaaS players. I feel like people get this when pricing in the stock, but sometimes forget it when looking at earnings.

In the midst of a pandemic, that came on the heels of an ongoing trade war, Cisco had more headwinds than many in the tech space. With all of that in mind, I believe the company performed above expectations and has room to gain momentum in future quarters as the pandemic subsides.

The first quarter guidance, as I see it is soft because of the uncertainty. If Chuck Robbins had been more aggressive, I would have been concerned. However, I do believe the company has some force multipliers in areas like Collaboration, Security, Applications and 5G where momentum could serve as an accelerant to getting results back on track and closer to a flat YoY.

While the pandemic and its economic impacts could reach further into Cisco’s new fiscal year, I do believe the company should see momentum build as the year continues. The company’s challenges seem to be, in many ways, already priced into the business. As companies resume more operations, Cisco is at the center of many parts of business digital transformation. This should be the catalyst to propel it into better results YoY, which is what investors should be looking for. 

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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Image Credit: Cisco

 

Daniel Newman