Bill Cara

Cisco Systems (CSCO) Financial Report

September 11, 2023

Cisco Systems is a Dow 30 constituent I considered for the Maverick Investor Portfolio due to its high +10.8% 10-year average annual total return. But I did not want to overload the diversified 10-stock portfolio with three technology sector companies as I first selected Apple (AAPL) and Microsoft (MSFT) comparables for their average annual total performance at +27.8% and +28.2%, respectively.

Cisco is a prominent provider of Internet Protocol-based networking and related products, facilitating data transfer, voice, and video across various networks. They offer services associated with these products and have a significant international presence, with foreign businesses accounting for 42.2% of their 2022 revenues. The company’s employment is about 83,300.

For the August quarter, Cisco actively reduced its backlog, which had surged due to unusual supply and demand dynamics during the pandemic. The backlog was initially three to four times the historical average but has since decreased. This reduction has been aided by improved supply availability, increasing product shipments, and substantial growth in the Secure Agile Networks category. This includes a 33% YoY increase in Secure, Agile Networks and double-digit growth in switching revenue. The backlog is expected to continue decreasing, with much of it set to be delivered in the first quarter of the following year. Cisco has roughly 40% of its 2024 revenue already secured.

However, Cisco has faced challenges, including a 14% YoY decline in orders during the fourth quarter, with service providers responsible for around half of this decline. The company expects modest top-line growth in fiscal 2024 but remains cautious due to macroeconomic uncertainty and potential fluctuations in enterprise demand. Despite this, higher share buybacks and pricing adjustments are expected to boost earnings per share.

Cisco is also exploring using artificial intelligence (AI) to drive demand and recently launched new Silicon One switching chips tailored for handling the data traffic required by AI operations.

For the April quarter, Cisco faced the consequences of easing supply constraints. While improved component availability led to shorter lead times and reduced backlog, it also caused customers to slow down new orders as they used existing inventory. Cisco aimed to return its product backlog to normal by early 2024, as customers became more cost-conscious amid macroeconomic uncertainty. Elongated sales cycles, project delays, and reduced spending were observed, contributing to a 23% YoY drop in total orders. At the time, Cisco anticipated modest revenue growth in fiscal 2024, with earnings expected to outpace revenue growth.

For the January quarter, Cisco’s performance showed solid results, with a 7% YoY increase in revenue and a 5% rise in earnings per share. Much of the growth was attributed to backlog drawdown. While some orders had longer sales cycles, deal sizes and closing rates remained strong. Cisco increased its full-year 2023 revenue outlook, citing the strong backlog, and did not see significant macroeconomic impacts on its business. Nonetheless, some challenges persisted, with a 22% YoY decrease in product orders in the January quarter. Cisco remained cautiously optimistic, noting steady demand, design wins, and a robust sales pipeline.

Looking ahead, Cisco anticipates a ‘modest’ increase in revenue for fiscal 2024, with earnings expected to grow faster. The company is confident about its prospects, supported by recent price increases, expense management, and share buybacks. However, the company emphasized the need for improved demand visibility before making new commitments.

My financial overview for the upcoming years indicates satisfactory expectations for revenue per share, cash flow per share, earnings per share, dividends declared per share, capital spending per share, book value per share, common shares outstanding, P/E ratio, relative P/E ratio, dividend yield, revenues, operating margin, depreciation, net profit, income tax rate, net profit margin, working capital, long-term debt, shareholder equity, return on total capital, return on shareholder equity, retained earnings to common equity, and dividends to net profit. Cisco is a very stable company with Value Line ratings of A++ for Financial Strength and #1 for Safety.

In summary, Cisco has experienced fluctuations in its backlog, with efforts to reduce it while navigating supply chain challenges. The company has seen growth in various financial metrics but remains cautious about economic uncertainties. Management is exploring AI-driven solutions and expects earnings growth to outpace revenue growth, and pricing actions and share buybacks to drive earnings per share.

The Maverick Investor Portfolio is tailored for patient, long-term investors seeking stability and strong financial performance. It comprises blue-chip company stocks ideal for buy-and-hold strategies during extended bull market trends.