Cisco’s Demand Metrics Look Solid, but Supply Chain Challenges Can Inhibit Near-Term Growth

Business Strategy and Outlook

The networking equipment behemoth Cisco continues to execute on its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2020 revenue, up from 43% in fiscal 2017. Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware. Cisco’s plan is assessed as the correct direction for maintainable growth and believe the firm’s strategic shifts through organic developments and acquisitions, keep Cisco as mainstay in today’s networks. The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and Cisco is considered as the only one-stop-shop networking vendor. Cisco is deemed uniquely positioned to interweave complimentary necessities, like networking and security, together to provide comprehensive solutions for clients.

Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is considered the preferred method of consumption for cloud-based resources. Cisco is rolling this sales model to additional products, with customers looking to purchase bundles with analytics and security. Cisco is evolving its portfolio at a more rapid rate to stay ahead of trends in areas such as switching, communications, cybersecurity management, software-defined wide-area networking, and analytics. Cisco is expected to continue looking to acquisitions to bolster its capabilities in these areas to offset pressure in maturing market segments.

Financial Strength

Cisco is considered a financially healthy company. With a fiscal 2021 debt/capital ratio of 22%, abundant free cash flow generation, and expected on-time debt payments, there are no fiscal concerns. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001, has increased the authorization over time, had about $8 billion remaining at the end of fiscal 2021, with no termination date. Cisco is expected to opportunistically look to purchase shares. Cisco has recurrently raised its dividend year over year, and modest annual increases are forecasted. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and strong operational and free cash flow generation is projected to continue in the future. Cisco is expected to manage its growing war chest with future cash deployments into strategic developments and acquisitions.

Bulls Say’s

Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds.
Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings.
The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. Cisco’s hardware is considered essential for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.

Company Profile

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The secure, agile networks business contains switching, routing, and wireless solutions. The hybrid work division has products for collaboration and contact center needs. The end-to-end security group has products spanning a variety of threat prevention necessities. The internet for the future division has routed optical networks, silicon, and optics. Optimized application experiences offer solutions such as full stack observability. Services are Cisco’s technical support and advanced services offerings. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

(Source: MorningStar)

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