Cisco’s New Guidance Means More Than You Might Think

Cisco Systems (NASDAQ:CSCO) posted solid fiscal fourth-quarter results last week. More surprisingly, and in contrast to the last several years, management offered a full-year outlook. Let’s see what that means for shareholders. 

Strong quarterly results

Cisco’s quarterly results confirmed that the company remains relevant as enterprises digitize their operations and develop hybrid work environments to allow employees to securely work from anywhere.

During the fiscal fourth quarter, which ended on July 31, revenue increased by 8% year over year to $13.1 billion. Granted, the 9% revenue decline in the year-ago quarter provided an easy base of comparison. And acquisitions contributed to 210 basis points of revenue growth.

But the results remain encouraging. They correspond to strong demand across the company’s portfolio of hardware and software networking solutions despite some headwinds from an industrywide shortage of components.

Colleagues working together in a data center.

Image source: Getty Images.

In particular, revenue from the infrastructure platforms segment, which includes networking equipment and software, grew 13% year over year to $7.5 billion. And consistent with the previous several quarters, management highlighted during the earnings call the strong performance of the collaboration platform Webex (with revenue from recurring subscriptions up 9% year over year versus a strong year-ago quarter) and the security offerings Duo and Umbrella.

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Surprising full-year guidance

Those strong results and prospects led management to surprisingly initiate full-year guidance. So far, because of the lack of visibility for the demand for networking solutions beyond the short term, Cisco used to communicate its forecast for the current quarter only. For the same reason, competitor Arista Networks has limited its outlook to the current quarter, too. 

Management now anticipates revenue to grow by 5% to 7% during fiscal 2022. That range seems encouraging in the context of Cisco’s huge revenue base, which would reach $52.8 billion at the midpoint of the forecast despite supply challenges that could span the full fiscal year, according to CFO Scott Herren. 

But more importantly, the long-term outlook indicates the company’s business has become more predictable, thanks to the successful transition to a subscription-based software model initiated several years ago. For instance, revenue from software grew 6% year over year to exceed $4 billion during the last quarter, and 81% of that revenue was recurring.

In addition, Cisco seems better positioned than in recent years to capture opportunities and support its more-predictable business. Indeed, the company had failed to adapt its offerings for high-growth web-scale providers, which allowed Arista to thrive in the cloud networking area.

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To illustrate Cisco’s recovery with its web-scale business during the fiscal fourth quarter, orders increased by 160% year over year after almost 30% growth last year. These numbers grew from a small base, but CEO Chuck Robbins said during the earnings call that revenue from web-scale providers has finally become meaningful.

And with triple-digit order growth for solutions that leverage recent 400G technology, which enables more bandwidth for networking traffic, Cisco seems poised to capture opportunities for many years.

Looking forward

Despite those encouraging long-term prospects, Cisco remains modestly priced. Based on the midpoint of management’s full-year outlook, the stock is trading at a forward price-to-earnings ratio of 21.

In addition, the company managed to accumulate $24.5 billion of cash, cash equivalents, and investments at the end of the last quarter. Given its modest debt load (relative to its scale) of $11.5 billion, it can leverage its large cash pile to acquire companies and deploy their technologies at a large scale thanks to its significant footprint.

Thus, I’m happy to hold my shares. Investors should closely watch Cisco’s virtual investor day on Sept. 15, when management will discuss its long-term strategy in more detail.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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View more information: https://www.fool.com/investing/2021/08/26/ciscos-new-guidance-means-more-than-you-might-thin/

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