CISCO, the US multinational technology conglomerate, reported Q3 results earlier this week. Revenue came in at $11.98 billion, down 8% year-on-year, beating analyst forecasts of $11.88 billion.
Infrastructure Platforms, consisting of core networking offerings such as switching, NGN routing, wireless, and data centres saw revenue drop 15% to $6.43bn (expected: $6.83bn). The division experienced manufacturing challenges and component constraints, as well as a slowdown of orders in April.
Applications, made up of the WebEx video calling service had revenue fall 5% to $1.36bn (expected: $1.43bn). The revenue decline was eased by the increased use of Webex video conferencing in the quarter because of lockdowns. New prospects were also added via free video trials, which the company believes will be converted into future revenue. There were over 500 million Webex meeting participants in April.
Security, consisting of identity and access management, as well as unified threat management solutions saw revenue rise 6% to $776m. The increase was due to improved demand across all three business segments.
Other products, comprised of service provider video, cloud and system management, and emerging technology saw revenue plummet 27% to $28m.
The company guided lower for total revenue for the fiscal 2020 fourth quarter. They expect it to fall between 8.5% and 11.5%, which better than analysts had forecast. This is despite CISCO announcing it would allow deferrals of payments on new orders to help customers whose finances have been affected by Covid-19. The deferral will go a long way to generating more customer loyalty, but at the cost of short-term revenue. Earnings guidance was also better than expected.
In terms of partnerships, CISCO has partnered with Microsoft’s Azure integration with Office 365, Amazon Web Services, and Alphabet’s Google Cloud. These partnerships are expected to generate more sales given that those customers are moving more applications to the cloud.
CISCO is also expanding its Industrial Internet of Things (IoT) portfolio by acquiring Fluidmesh Network, a global leader in wireless systems for security, industrial and business-critical operations.
The upbeat guidance and relatively consistent product order growth rates were pleasing. Since CISCO published the results earlier this week, the stock has been upgraded by a few analysts (with a target price of around $48). CISCO currently trades at $44.17 a share. This puts the stock on a historic PE of 17.1x (forward of 13.6x) and a dividend yield of 3.3%. The company has attractive gross, operating and net margins of 64.4%, 28.6% and 21.3% respectively. CISCO’s return on equity (ROE) is above 30% and the company generates good free cash flows. A debt-to-equity ratio of 0.45x, debt-to-ebitda of 0.95x and current ratio of 1.6x suggests its debt levels are not onerous. However, the declining trend in revenue is a concern, with revenue having fallen 4% last quarter, even before the coronavirus pandemic. Year-to-date the share is down 9.4%.