Cisco Reports Solid Earnings, Pushing Security To Sustain Business Growth

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Cisco‘s (NASDAQ:CSCO) Q4 fiscal 2015 growth slowed down a bit, but the company was able to beat market expectations on revenues and earnings. Cisco’s CEO mentioned that the updated business strategies and efforts put in over the past several years were beginning to show some promise. Cisco’s new hardware products are driving its switching and routing sales, and it is effectively fending off the competition from white label hardware and software defined networking (SDN). Cisco has been responding well to the change in the industry environment by bolstering its security and software portfolio partially through acquisitions. Cisco does have an SDN platform known as Cisco ONE (open networking environment), but the company largely focuses on its proprietary hardware, marketing it as more secure than white label products. This is the reason why it has been strengthening its security portfolio – to convince its customers to pay a higher amount for secure networking solutions.

Charles H. Robbins took over as Cisco’s CEO recently, and appears to be looking to do away with under-performing and non-core businesses and focus on promising segments instead. The company announced last month – when John Chambers was still CEO – that it was planning to divest its TV set-top box unit for $600 million, as revenues from video equipment sold to cable operators were falling consistently. [1] Cisco can invest the cash received through this deals to bolster its security portfolio, which is crucial for its business growth.

For the quarter, Cisco reported revenues of $12.8 billion, a year-over-year (y-o-y) improvement of 4% driven by a stronger product portfolio and effective resource allocation to growth strategies. Its operating expenses increased relatively slowly, registering just 1% rise on a GAAP basis and 3% rise on a non-GAAP basis. [2] Cisco’s non-GAAP net income rose 6% y-o-y to $3 billion or $0.59 cents a share, 3 cents ahead of the consensus estimates. [3]

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We have a $27 price estimate for Cisco, implying a slight discount to the current market price.

See our full analysis of Cisco

Ramping Up Security To Improve Proprietary Hardware Sales

The networking industry is gradually shifting from hardware to software defined networking, because of its cost effectiveness. While companies offering SDN provide a software layer over cheaper white-label products chosen by the customers, Cisco continues to focus on providing complete networking solutions including hardware and software, that are relatively expensive. Cisco claims that open networks that use white-label hardware are more prone to cyber breaches than networks built with its proprietary hardware and software. In order to justify the price difference, Cisco has been investing its resources in network security, which indirectly impacts its routing and switching sales. Although software defined networking has gained significant traction, its negative impact on Cisco’s proprietary protocol hasn’t been as extreme. This is attributable to the fact that Cisco has progressed well on improving its network security and has also adapted to the change in the networking environment.

During its earnings call, Cisco mentioned that its security revenues increased 4% (faster than routing and switching), with an acceleration in the shift from hardware to software. The company saw increased adoption of subscription-based and software offerings, which should support its recurring revenues going forward. Cisco earlier announced its intent to buy cloud-based security company OpenDNS, as a step to enhance its security and collaborations offerings. The company is looking to push its threat-centric security across extended networks; the expansion of FirePOWER security service across thousands of ISR routers and ASA firewall platforms is one example. Cisco acquired intelligent cyber security company Sourcefire in 2013, and its customer base has been growing substantially. [1]

With such moves to elevate network security, Cisco will be able to bundle its hardware with better software products, which will ultimately boost its routing and switching sales. The company is trying to build an architecture in every business division where hardware, software and service are integrated to make it convenient for the customer. This will make it more convenient for the customer and enable better and more secure delivery of services.

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Notes:
  1. Cisco’s Q4 fiscal 2015 earnings transcript, Aug 12 2015 [] []
  2. Cisco Reports Fourth Quarter and Fiscal Year 2015 Earnings, Cisco, Aug 12 2015 []
  3. Cisco Revenue And Profit Grow, The Wall Street Journal, Aug 12 2015 []