Cisco, the computer networking equipment maker, saw its security business grow in its fiscal fourth quarter with strong demand for online services and software during the pandemic. However, this was not enough to offset weakness in its core network hardware business where it provides items such as servers, storage and networking equipment, as many customers delayed purchases.
Revenue declined 9% to $12.15 billion, marking a third straight quarterly drop. Management also guided for further sales weakness in the coming periods.
Despite some margin pressure, net income was 19% higher than the year before to $2.6 billion, however that was off a low base given the $667m in once-off tax costs incurred in that period.
Earnings per share rose 22% to an adjusted 80 cents a share, better than Wall Street expected, as the company managed to reduce operating expenses by 9%. It is hoping to trim its cost base in the next period by a further $1 billion dollars, or 6% of its operating costs.
The individual business segments performed as follows:
Infrastructure Platforms, consisting of core networking offerings such as routing, switches, wireless, and data centres saw revenue continue to slide 16% to $6.63 billion, after a 15% drop last quarter.
Applications, made up of the WebEx video calling service, fell 9% to $1.36 billion. The registrations for the free video calling trials, which were touted as potential subscribers last quarter, failed to be converted into additional revenue. This was despite the 500 million participants of the video calling service in April.
The security services business was the one bright spot, with revenues climbing 10% to $814 million as customers required managed security, detection and response, and Software as a Service (SaaS)-based products.
Cisco says it plans to sell most of its products on a subscription basis, or as a service, to help reduce its exposure to cyclical downturns such as the one being experienced currently. More than half of its revenue now comes from software and services.
The company ended fiscal 2020 with profits down 3.5% at $11.21 billion, and revenues 5% lower to $49.30 billion. It also announced that CFO Kelly Kramer would be retiring after being in the position for 5 years, but would stay on until a replacement was found.
Big cloud offerings by the likes of Amazon, Google and Microsoft have dented demand for Cisco’s products. The company is playing catchup, as it transitions from its old legacy hardware business to a more services and software oriented one. Whilst gross margins are high and relatively stable for now, debt is high and revenues continue to fall, a very concerning trend (especially considering the poor sales guidance offered by the company). Cisco also has a new acquisition to integrate and is awaiting approval for the purchase of a communications business in China. These types of investments unfortunately haven’t made up for declining sales. We prefer Amazon in the sector, albeit at a better entry level than it is currently trading. The technology-heavy Nasdaq Composite index is up over 26% this year, whilst Cisco shares are down nearly 12%.