Macro Headwinds And Service Provider Weakness Fail To Dampen Cisco’s Q3 Momentum

by Trefis Team
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Cisco (NASDAQ:CSCO) reported its fiscal Q3 results on May 15. The company beat consensus expectations on revenue and earnings. Cisco seems to have benefited from the unification of different operating systems that the company had on its multiple products. The company has been growing the strength of its platform by subsuming acquisitions to enhance and extend the Cisco platform’s security set. While the management re-iterated that Cisco has seen resilience in global spending, in the aftermath of the tariff increases, the management had to work hard on supply chain and pricing to maintain margin discipline.

Owing to the weakness in the service provider business and tariff concerns, we have marginally lowered our fair value estimate of Cisco’s share to $51 per share, 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.

Performance in Q3

  • Infrastructure Platforms Revenues grew to $7.5 billion (+5% y-o-y) driven by strength in switching and routing.
  • Applications Revenues grew to $1.4 billion (+9% y-o-y) driven by strength in Unified Communications software, TelePresence, and AppDynamics.
  • Security Revenues grew to $707 million (+21% y-o-y) driven by strength in identity and access, advanced threat, and unified threat.
  • Other Products Revenues declined to $39 million (-83% y-o-y).
  • Total Products Revenues grew to $9.7 billion (+4% y-o-y).
  • Services Revenues grew to $3.2 billion (+2% y-o-y) and was driven by software and solutions.
  • Total Revenue grew to $13 billion (+4% y-o-y).
  • Q4 revenue is expected to grow 4.5%-6.5% y-o-y.

We forecast Cisco’s EPS figure for full-year 2019 to be $2.53. Taken together with our forward P/E multiple of 20x for the company, this works out to a $51 per share price estimate for the company’s stock, which is around the current market price.


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