Cisco Systems, Inc. (NASDAQ:CSCO) delivered another solid quarter of earnings and sales — the last with John Chambers as CEO — and that should reassure the market that CSCO’s turnaround is for real.
Like many players in the field, CSCO is refocusing its business to a recurring revenue model driven by subscriptions, and it has been a long and painful transition.
But as the market saw with the prior quarter’s results, the move to software-defined networking is paying off.
Indeed, CSCO once again beat Wall Street estimates amid steady growth in IT spending and the company’s expansion of software and cloud service businesses among enterprise and carrier networking customers.
The key to the rebound this year has been strong sales of switching systems — CSCO’s biggest but also most competitive business. Happily for anyone holding Cisco stock, a new product line is proving to be a hit.
Revenue for the switching systems business increased 6% in the quarter. Sales of routing equipment — a related product — advanced 4%.
Moving beyond its core routing and switching business has been fraught with risks, as was made clear in the Cisco earnings release.
Streaming online video is among the most important areas of growth, but CSCO is in danger of slipping behind rivals. Sales of equipment that allow cable companies to deliver video saw revenue decline 5%.
China remains another area of weakness for CSCO, as customers distrust CSCO because of a perceived relationship with U.S. intelligence agencies. Sales in China tumbled 20% in the most recent quarter.
CSCO Earnings Beat by a Penny
Perhaps most helpfully, CSCO is starting to cycle against last year’s disappointing results. Going up against a period in which sales decline for the first time in half-a-decade makes for some easy comparisons.
For the most recent quarter, CSCO said earnings rose to $2.44 billion, or 47 cents per share, compared with a year-earlier profit of $2.18 billion, or 42 cents per share. On an adjusted basis — which is what Wall Street analysts care about — earnings came to 54 cents per share. That was a penny better than analysts’ average estimate, according to a survey by Thomson Reuters.
Revenue increased to $12.14 billion from $11.55 billion. That also beat the Street estimate, which stood at $12.07 billion.
CSCO’s forecast — always the most important part of any earnings release — was just okay, and that helps explain why the stock’s reaction was so muted on the results.
For the current quarter, CSCO expects earnings to come in at 55 cents to 57 cents per share, but that only brackets analysts’ estimate of 56 cents. Revenue is forecast to rise 3% to 5%, which is slightly ahead of Street views.
The world’s largest maker of networking equipment is doing an able job of fighting off competitors offering cheaper — if less capable — products. It has also become a favorite technology partner of the Federal government.
That said, CSCO doesn’t look like a screaming buy at this point. It goes for 13 times forward earnings with a 10% growth rate, which seems about right. Besides, it’s has already returned 33% over the last 52 weeks vs. a 13% gain for the broader market, but by no means is Cisco stock a sell.
Once the CSCO turnaround shifts into second gear, that’s when you can bet on more significant outperformance for Cisco stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
