The year 2015 was not a great one for Cisco Systems, Inc. (NASDAQ:O:CSCO) though it was not a bad one. However, the company has been a consistent performer with its earnings topping expectations. The strong fiscal second quarter numbers boosted the sentiments of investors by lifting its stock close to 10% when the overall market was witnessing a significant drop on Thursday. The current year appears to have started well for the company. The question is whether it can sustain the momentum throughout the year. The company is making earnest efforts to see that the current year is better than the last year, to say the least, by focusing on acquisitions to boost its software, as well as, services. That included security, cloud, video and collaboration markets. The year 2015 witnessed an accelerated pace of acquisitions as the company acquired eleven companies compared to six in the preceding year. Let’s look at the positives, as well as, the negatives to take a call on going long.
China Plays A Crucial Role
Cisco Systems, Inc. (NASDAQ:CSCO)’s results for the second quarter demonstrated both strengths and weaknesses. The macroeconomic environment has been a challenging one, and it did well to report better than expected revenues. One of the positive things was that the company was able to overcome the issues faced in China that have hurt its business in the past. One of the reasons it could not perform very well in the region was the suspicion among the corporate or the government entities that non-Chinese hardware might be used by spies. The emergence of alternative products from the domestic manufacturers like Huawei Technologies has also hurts its business in the past.
That appeared to be a thing of the past as far as Cisco Systems, Inc. (NASDAQ:CSCO) was concerned. In November, the company reported that it was able to witness a 40% surge in the order rate in China. If anyone considered that as a one-off event, the subsequent developments do not support the theory. A few days back, the network switch maker indicated that orders from China jumped 64% in the second quarter ended in January. The surge in the order was fueled by video equipment demand. The company is likely to maintain the momentum in getting the orders from China, which would be a positive for it.
Positives And Negatives From 2Q
Cisco Systems, Inc’s. (NASDAQ:CSCO) revenue in routing equipment division advanced 5% in the second quarter, which faced rough weather lately and even shrank. Only communications carriers purchase the kind of hardware and their buying of the products steadily helped it to achieve the growth. Video equipment is witnessing hectic activity among the carriers. As a result, the segment witnessed 37% uptick in the recent quarter. Its other divisions, security, as well as, collaboration products also witnessed the growth of 11% and 3% respectively. Its other products surged 31% while services revenue advanced 2%. The company gained from its tactical portfolio that focused on companies, as well as, countries than ever before on digitizing everything. That was because its focus or marketing was not restricted to IT alone.
The strength in some of the segments allowed it to gain 2% top line to reach $11.83 billion. However, there were also weaknesses for Cisco Systems, Inc. (NASDAQ:CSCO) that was due to the market conditions. For instance, its Switching revenue fell 4% YOY while revenue from Data Center dipped 3%. Both the segment reversed the trend witnessed in the first quarter. Its CEO, Chuck Robbins, said that signs of caution started towards the close of the quarter among some corporate customers. He also indicated that the companies have started to held back orders on non-essential purchases like the switching system used on the corporate campuses. That meant the customers were giving a pause and were trying to adjust to the current market conditions.
Identification Of Four Key Areas
Cisco Systems, Inc. (NASDAQ:CSCO) identified four key areas for accelerating its innovation, as well as, portfolio transformation. Accordingly, the company is looking to define the next-generation of networking starting with the data center with its ACI platform. The second key factor was the focus towards fueling growth in its security business, which assumes greater importance in the wake of increased threats from cyber criminals. The third factor is shifting its tactics more towards its portfolio that would be delivered in on-premise, as well as, cloud-based SaaS models. These three key factors should be good enough to keep propelling growth. Aside from that, the company plans to use M&A as a tool to support its internal innovation in the key areas of growth.
Aside from these, Cisco Systems, Inc. (NASDAQ:CSCO) stands to gain from the acquisition of Jasper Technologies for $1.4 billion. The confidence was due to its role in IoT and that it could provide recurring revenues to the company. IoT devices are growing fast and that should offer an influx of data, which requires to be managed. The acquisition should help in offering software solutions to analyze the data. That would also support the hardware business and could provide synergy to growth. Similarly, the company’s sports stadium connective effort is a bullish one because of the growing demand for connected services at sports venues. This could come with high-growth potential with considerable potential for revenue and might go beyond the sports venues.
Valuation
Cisco Systems, Inc. (NASDAQ:CSCO)’s return on assets and equity for the trailing twelve month period was 8.9% and 16.4% respectively compared to the industry average of 5.6% and 11.5% respectively. Its price to earnings for the same trailing twelve month period was 12.1 times compared to the industry average of 19.6 times. That meant there is potential for upside rewards. It had free cash flow of 3.6 billion.
Conclusion
Cisco Systems, Inc. (NASDAQ:CSCO) has not been an aggressive player, but its performance has always been steady. It rarely misses the expectations. Currently, the stock is trading a little over $2 above the 52-week low price reflecting the market conditions. While there are some weaknesses, the positive should be able to offset it. Currently, it seems to be there.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.