6 Reasons Why Cisco Still Matters Despite a Terrible Earnings Report
George Carlin once told a joke about a sportscaster who says, “Here’s a partial score from the West Coast: Los Angeles, 6.”
I thought about that line covering Cisco System’s (ticker: CSCO) April-quarter earnings report on Wednesday. The numbers for the world’s leading provider of networking hardware were objectively terrible . Revenue was down 8% from a year earlier. The outlook—pre-Covid 19—had been for a decline of 1.5% to 3.5%. Cisco sees revenue in the July quarter slipping even more—down around 10%. The company’s core “infrastructure platforms” business, which includes routers and switches, was down 15% in the April quarter and could decline more in the July quarter.
But those are partial scores.
Cisco shares actually spiked 4.5% the day after it reported. Because expectations matter . And because Cisco—like many of the world’s largest technology companies—may actually emerge strengthened from the pandemic.
Here are six takeaways from Cisco’s not-so-terrible quarter:
Better off than you think. Cisco still sells expensive big-ticket hardware, and the company serves some industries—airlines, hotels, casinos—that are in deep trouble. It isn’t recession immune. But, as Evercore ISI analyst Amit Daryanani wrote in a post-earnings note, Cisco has expanded into security and software, and those businesses should bolster the company during a recession. Daryanani thinks Cisco can gain market share in core networking, in part by leveraging its strong balance sheet to support customers.
5G is already helping Cisco. J.P. Morgan’s Samik Chatterjee writes that Cisco is seeing an acceleration in the deployment of 5G networks. ( Qualcomm is saying the same thing; see page 26.) Chatterjee says the trend could also benefit Cisco’s core infrastructure business “as customers increasingly acknowledge and refresh their outdated networks.”
Who needs Zoom? Cisco acquired the videoconferencing service WebEx for $3.2 billion in 2007, a deal you probably forgot about and that Cisco would have liked to forget about until recently, too. While shares of red-hot Zoom Video Communications (ZM) have spiked 150% this year on home schooling and virtual happy hours, WebEx is serving large enterprises, the same ones that buy Cisco’s networking gear. Cisco doesn’t break out WebEx revenues, but consider this: WebEx hosted over 25 billion meeting minutes in April, triple the level in February—and more than six times the 4.1 billion video meeting minutes Microsoft (MSFT) Teams had in April. (Zoom declined to provide similar data.)
Still buying back stock. In an interview with Barron’s, CFO Kelly Kramer noted that Cisco remains committed to returning 50% of free cash flow to holders in dividends and buybacks, always buying enough stock to offset share issuance to employees. But Cisco tries to be opportunistic with its repurchases, and with shares tumbling in February and March, Cisco bought back close to $1 billion worth of stock at an average price of $39.71 a share; the stock is now about 10% higher. Cisco has another $10.5 billion left on its buyback plan; expect them to use it all, and then some. At a time when some tech companies are hoarding cash and hunkering down, Cisco vows to protect its dividend, which yields 3.3%.
Who needs an office? Cisco has always let people work from home, and it’s in no hurry to bring everyone back. Overall, 95% of Cisco’s employees are working from home. Many tech companies are at that level or higher, and aren’t rushing to reverse course. Tech companies have historically liked big, showy buildings with gyms, on-site yoga classes, and cafeterias with baristas and macrobiotic food. It’s going to take time to unwind all that, but those days are over. Your new office? You are sitting in it.
It isn’t just the cloud. Year to date, Cisco is down 9%. The stock trades for 3.8 times estimated fiscal 2020 sales and under 15 times earnings. Compare that with Zoom, up almost 150% this year, trading for more than 50 times 2020 estimated sales, and close to 400 times estimated 2020 profits. Zoom is growing fast, Cisco is shrinking; Cisco makes hardware, Zoom is playing in the clouds. But remember that those clouds are made of routers and switches and servers—the cloud does not live on software alone.