Did Focus On Software Help Cisco Carry Its Q2 Momentum Into Q3?

by Trefis Team
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Cisco (NASDAQ:CSCO) reports its fiscal Q3 results on May 15. The company’s Q2 had come in ahead of consensus expectations due to a strong performance by its Infrastructure Platforms as well as Applications segments. For Q3, we expect Cisco’s results to be driven by its recent innovation efforts, with its Applications and Security segments witnessing the strongest growth. Per Trefis estimates, Cisco’s shares have a fair value of $54, which is around the current market price. Our interactive dashboard on Cisco’s Price Estimate outlines our forecasts and estimates for the company.

A Quick Look At Cisco’s Revenue Sources

Cisco makes money by selling networking and communications equipment and software that are the backbone of the Internet. There are 5 sources of Cisco’s revenue which totaled $49 billion in fiscal 2018

  • Infrastructure Platforms ($28 billion in fiscal 2018, 57% of total revenue): Revenues are derived from the sale of core networking technologies of switching, routing, data center products and wireless.
  • Applications ($5 billion in fiscal 2018, 10% of total revenue): Revenues are derived from the sale of software-oriented offerings that sit on top of Infrastructure Platforms, such as collaboration (Cisco TelePresence etc) and internet of things (IoT) and analytics software.
  • Security ($2 billion in fiscal 2018, 5% of total revenue): Revenues are derived from the sale of threat detection, management and security products, with cloud-focused security offerings growing.
  • Other Products ($1 billion in fiscal 2018, 2% of total revenue): Revenues are derived from the sale of cloud and system management tools. This segment also used to house the company’s Service Provider Video Software and Solutions (SPVSS) business, which was hived off in 2018.
  • Services ($13 billion in fiscal 2018, 26% of total revenue): Revenues are derived from providing technical consulting and support services.

Cisco added $82 million in total revenues from 2016 to 2018 (CAGR of 0.1%). Revenues over this period remained flat due to the company re-aligning its portfolio along high growth areas. The company plans to derive ~30% of its revenues from software over the next 2-3 years, and has been making changes to its portfolio through acquisitions and divestitures.

Summarizing Performance Over Recent Quarters, And Highlighting Our Expectations For Q3

  • Infrastructure Platforms revenue have grown steadily year-on-year thanks to growth in campus and wireless sub-segments. These gains have been partially mitigated by pressure in the service provider sub-segment.
  • Applications revenue have grown by 20%+ year-on-year over recent quarters due to the rapid adoption of unified communications, telepresence, and AppDynamics – a trend that we believe will continue to boost revenues going forward
  • Security revenues have grown thanks to increased demand in identity and access, advanced threat, and unified threat management products. This should remain upbeat in Q3 too.

Cisco’s management had guided for a revenue growth of 4-6% for the company in Q3. We expect the Q3 revenues to come in at $13 billion (+5% y-o-y). In Q3, we will also be looking for updates around the 400-gig product deployment and completion of the divestiture of the SPVSS business.

We forecast Cisco’s EPS figure for full-year 2019 to be $2.49. Taken together with our forward P/E multiple of 22x for the company, this works out to a $54 per share price estimate for the company’s stock, which is around the current market price.

Do not agree with our forecast? Create your own price forecast for Cisco by changing the base inputs (blue dots) on our interactive dashboard.

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