An apprehensive stock market, biting its fingernails over the prospects of an imminent global recession, needed an excuse to dump shares of tech giant Cisco Systems (CSCO) on earnings day. Armed with its fiscal fourth-quarter results, the San Jose-based company offered one.
Not Much to Complain About the Fourth Quarter
Cisco delivered another all-around beat on both the top and bottom lines, albeit narrow ones, keeping alive a winning streak that dates back to 2014 at least.
Revenue of $13.4 billion increased 6% year over year, excluding the now defunct video software solutions, with strength extending across Cisco's product and services portfolio. Switches saw growth reach the double-digit levels, in part as a result of the continued success of the Catalyst 9000 and Nexus 9000 product lines at the data center.
Security, still representing only a small piece of Cisco's product revenue at 7% of the total, was once again the best-performing segment. The solid results reflected an increasingly complex, distributed network environment that remains heavily exposed to cyber threats. Subscription revenue reached a whopping 70% of the total services business, following the company's push for a subscription-heavy network equipment refresh over the past few quarters.
Gross margins also looked robust, higher year over year by more than two percentage points on a non-GAAP basis. The improved levels of profitability can be explained in part by the shift toward higher-margin software and subscription revenue, only partially offset by cost headwinds caused by the trade wars. The combined impact of solid top-line growth, margin expansion and Cisco's share buyback efforts was adjusted earnings of 83 cents a share, a penny better than consensus, that increased a respectable 19% above year-ago levels.
Slowing Growth Raises a Flag
But investors didn't find solace in Cisco's robust fourth-quarter performance, instead zeroing in on fiscal first-quarter guidance that, to be fair, looked a bit soft.
For the upcoming period, Cisco expects revenue to grow a mere 1% and reach $13.2 billion at the mid-point of the guidance range, not quite the same $13.4 billion that Wall Street had been expecting. he company's earnings guidance range also failed to bracket the 83 cents a share that analysts had been projecting.
Dragging the numbers down are Cisco's budget-constrained service provider clients, still struggling to balance needed infrastructure investments with high expectations for cash returns to shareholders while preventing their balance sheets from leveraging up further.
Weakness became particularly evident in the Asia Pacific and other emerging countries. Luckily for Cisco, China represents only a very small piece of the business. But revenue from this part of the world is expected to tumble as potential Chinese clients continue to push the U.S.-based network provider out of the market. Meanwhile, the BRIC plus Mexico group saw revenue drop by a sizable 20% in the fiscal fourth quarter.
Finally Priced to Own Again
Cisco's earnings report looked far from spotless, to be fair. But it would be an overreaction to believe that the business is in distress or that the company is at risk of losing its earnings growth firepower -- per-share earnings are currently projected to rise by about 12% annually through fiscal 2021. Yet this is what the stock's 20% price drop since the recent peak of $58 a share reached one month ago seems to suggests.
Instead, I believe that Cisco is now a high-quality stock priced conservatively, given the strong fundamentals of the company that are further reflected in robust cash generation and a liquid balance sheet. With Cisco likely to trade at a fiscal 2020 P/E of only 13.7 times after Thursday's opening bell, I think that the share price weakness that I anticipated in May has run its course. The stock looks enticing once again, at the mid-$40 levels.