Concerns over waning technology demand and downbeat enterprise spending has pressured the tech sector for most of the year. And it certainly hasn’t helped that rising inflation and interest rate increases continue to adversely affect businesses that rely on heavy investments.
In the case of Cisco (CSCO), which is set to report first quarter fiscal 2023 earnings results after the closing bell Wednesday, the company is investing in ways to grow its recurring revenue in subscription-based software and services. Management is shifting away from its core business of selling network hardware switches and routers, pivoting more towards software and applications, particularly those services that generate high recurring revenues. However, the transition hasn’t yielded the immediate results investors expected.
The Q4 revenue in Cisco’s largest business segment (Secure, Agile Networks), which includes data-center networking switches, declined 1% from a year earlier. Meanwhile, revenue in the second-largest segment, which contains networking hardware, was down 10%. However, the management issued better-than-expected guidance for its full 2023 fiscal year. Given the recent rise in inflation, interest rates and supply chain disruptions, Cisco deserves some credit for navigating this environment in the manner that it has.
The company, which still generates strong free cash flow, believes that in the the next three years Cisco’s subscription revenue will account for 50% of total revenue, which would be a six percentage points increase (from 44%) in fiscal 2021. This suggests Cisco’s current structure is healthy enough to withstand any near-term revenue drought. In the meantime, with an attractive dividend yield of almost 3%, investors can be patient. The company on Wednesday must nonetheless show improvement within the software and subscription businesses as it scales down the legacy hardware segments.
In the three months that ended October, Wall Street expects Cisco to earn 84 cents per share on revenue of $13.31 billion. This compares to the year-ago quarter when earnings came to 82 cents per share on revenue of $12.9 billion. For the full year, ending July 2023, earnings are projected to rise 5.05% year over year to $3.53 per share, while full-year revenue of $54.11 billion would rise about 5% year over year.
I have made this argument for some time: Cisco stock, which has fallen 30% year to date compared to a 16% decline in the S&P 500 index, does not accurately reflect the qualities of the company and its leadership. Amit Daryanani, analyst at Evercore ISI, last week assigned a “Tactical Outperform” designation on Cisco stock. Daryanani, who has a $56 target on the stock, suggesting 22% premium, is optimistic about what the company will report Wednesday and the stock’s reaction to the results.
“Our checks through the quarter have suggested that Cisco is seeing better demand tailwinds as supply continues to improve across their core campus and data center solutions,” Daryanani writes. “At the same time, we think Cisco has been more aggressive in picking up share in the security and optical space.”
Increased demand not only for Cisco’s infrastructure and networking services, but also for cloud computing and telecom networks services will be key drivers of Cisco’s growth in the quarters ahead. In the fourth quarter, the company reported earnings of 83 cents per share which beat analyst estimates by a penny, while revenue of $13.1 billion beat by $327 million.
Cisco upped its full-year 2023 earnings forecast to a range of $3.49 and $3.56 per share, versus estimates of $3.53. Fiscal 2023 revenue is expected to up between 4% and 6% year over year, compared to expectations of 3.3%. On Wednesday the market will want to see whether Cisco can improve on these metrics before taking a long-term look at the stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.