Finally, Cisco gets what it deserves: Cisco Systems, Inc. (NASDAQ: CSCO) –

Finally, Cisco gets what it deserves: Cisco Systems, Inc. (NASDAQ: CSCO)


The heavyweight technology, Cisco Systems (CSCO), has recently exceeded expectations with its Q1 / 2018 fiscal year earnings and has since recovered. Investors finally discovered the deep value of Cisco and enthusiastically applauded Cisco's guidance to return to revenue growth in the second quarter of 2018.

Following such an optimistic market view on Cisco, it's time to review the results Financial and if the stock offers an attractive buying opportunity for dividend investors.

Source: Cisco Systems: all courtesy remains

What's happening in Cisco?

Cisco has a history of exceeding market expectations by a fraction and continued that streak with its fiscal Q1 report. He reported an EPS hit of $ 0.01 and an income contraction of -4%.

More important than these figures is that the company reported a 3% increase in net income and saw its recurring revenue base grow to 32%. Even more impressive was the 10% growth in deferred revenue reaching $ 18.6B driven by software and subscription offerings. That solid performance really shows that Cisco's subscription history is completely intact and gains momentum in the top line as well.

The big news for the markets was Cisco's orientation. For the first time since 1Q 2016, Cisco is moving towards revenue growth (marginal of 1-3%) for the second fiscal quarter. That is a great event for a company as big as Cisco that currently has a market capital of more than $ 185 billion.

As a result of this promising guidance, the market sent Cisco shares almost 10% higher in the following days as its PE expanded from less than 18 to almost 20 times the profits.

  Graph CSCO data by YCharts [19659011] Limiting a multi-trimester streak of revenue contraction The transformation of Cisco's business from traditional product offerings to subscription-based offers is finally starting to show itself in the top line. Interestingly, it is a well-known fact that such a business transformation initially leads to a decrease in revenues as a large part accumulates for future periods.

Even so, the market has ignored that fact and basically ignored the strong growth of Cisco's deferred revenue and is now rapidly investing its opinion on Cisco, thus sending the shares faster, faster and fiercer.

Let us highlight the importance of deferred revenue figures for Cisco in order to demonstrate the magnitude and importance they already have for the company.

The idea of ​​this business transformation is to promote offers that were consumed perpetually to subscribe, or to put it another way, move existing offers to subscriptions. In this way, Cisco will be able to build a stable, reliable and recurring income base for its future, which should be less susceptible to seasonality and other external factors. The execution of this strategy means that in the first years many revenues that would have already been recognized under the old model are transferred to future periods. Unfortunately, it is not possible to decipher exactly how much revenue would have been registered in each fiscal quarter according to the previous model, but the things that we do know sufficiently underline the success of this commercial transformation:

  1. In the last four complete financial years, Cisco has recognized $ 2.3B of deferred revenue of which $ 1 billion originates only from fiscal year 2017. This represents about 1.5% of total revenues and Cisco expects this impact to accelerate to 2-3 percentage points in total revenues to as we move from FY2017 to FY2020.
  2. Recurring bids now control 32% of total revenues more than 3 points Y / Y
  3. Deferred revenues increased to $ 18.6B and increased 10% A / A with revenues from deferred products increasing 16%.
  4. Software subscriptions skyrocketed 37% A / A.

All this clearly shows strong growth and it is only a matter of time until we see these figures also recognized in the income statement. That steady and strong growth in deferred revenue has not suddenly arisen out of thin air, as in fact positive indicators have existed for some time. Take the Cisco Security segment as an example. Revenues increased by 8%, but deferred revenues increased by 42% as the company saw a continuous boost.

Although Cisco shares have not had anything worse in 2017 (their performance has barely surpbaded the SPY marginally before the release of fiscal first quarter earnings), the stock has not benefited from the very strong technological rally of 2017 As a result, it was only negotiated for an 18 times cheaper profit valuation before the profits.

Now that the cat is out of the stock market, the markets are finally giving Cisco what it deserves, that is, a higher multiple since the growth of top-line revenue driven by strong growth in offers based in subscription. As a result, Cisco is outperforming the broader market and catching up with technological recovery.

 Chart CSCO data by YCharts

It should also be noted that Cisco's revenue of 1% -3% growth guidance is not completely driven by the model of Subscription that is having traction, but also by a renewed strength in orders similar to Q1 where total orders for products grew by 1% driven by a 12% growth in the commercial customer segment. Still, as CFO Kelly A. Kramer says, the impact of deferred revenue growth is certainly more substantial despite remaining an obstacle to further revenue growth:

We continue, I would say, growing the base of the offers faster and putting it in the balance of what is coming out. But, once again, both the year-on-year increase in the balance, the $ 5.2 billion went up 37% and my income statement also went up 37%. But I keep putting more and more offers and, as we increase the scale through the core networks, not only in the change, but in the whole DNA Center, I think it will continue to increase. So it's still going to be a headwind. And as I said before, these 1.5 to 2 points will move to more or less than 2 to 3 points in the next few years as we have more scale there.

Source: Cisco Earnings Call FY2018 / Q1

As a dividend investor, by virtue of its nature, I am very focused on the security of dividends and dividends of the company.

What about the Cisco dividend?

Driven by a strong rebound after earnings, Cisco's performance now hovers around 3% and continues to offer tremendous value. In addition, Cisco must declare a dividend increase in February.

The company has increased its dividends by a staggering 333% since its first dividend in 2011. Year-on-year increases have enthused investors:

  • 2012: + 33%
  • End of 2012: + 75% [19659015] 2013: + 21%
  • 2014: + 12%
  • 2015: + 11%
  • 2016: + 24%
  • 2017: + 11.5%

This impressive dividend growth in the middle of sales decreasing has undoubtedly increased the proportion of payment. At this time, both the cash dividend payment index of the company and the EPS payment index remain +/- 7.5 pp above / below 50%. In terms of free cash flow, the proportion is 70%, which is certainly not low, but remains comfortable for an action that yields above 3% and with 7 consecutive years of double-digit dividend growth rates .

In addition to that, Cisco is one of the richest companies in terms of cash reserves. Currently, Cisco has $ 71.6 billion in liquidity, which represents around $ 1,000 million sequentially and Y / Y. Most of that pile of cash stays abroad with only $ 2.5 billion in cash and equivalents. of cash available in the United States. Therefore, the cash pile increased by around 7% even though the company raised its dividends by 11.5% in February 2017 and by 24% in February 2016.

As such, the dividend investors They should not worry about the increasing payment ratios, since the dividend is solid as a rock and is likely to rise again in February. Cisco continues to be a cash flow machine and is very dedicated to its dividend, while also eager to maintain enough firepower to make another acquisition if it is considered valuable.

Cisco's next dividend has not yet been declared, but the share is expected to go ex-dividend in early January.

To track the payment of dividends and dates without dividends, I use the Dividend Calendar and Dashboard Tool that shows my expected dividend payments, in this case for October 2017. Here we can see that I expected a substantial payment on October 24 from Cisco with the stock forecasted as an ex-dividend around October 3. 19659041]

Information for the investor

In a previous article, I wrote that

… the market is not really liking Cisco because of the declining revenue and the warm growth prospects

at time that claims that

… once the business transformation of the company is complete and the market begins to appreciate the huge growth of Cisco's deferred revenue the last time at that time, shares of Cisco will start trading at higher multiples.

Now the market is finally appreciating subscription business model in combination with solid orders and multiple future-oriented acquisitions, the stock has been shooting higher ever since. This new business model will help Cisco to benefit from greater stability and less fluctuation in its sales, and investors will be rewarded with a business in constant growth with a very solid base of recurring revenues.

Despite a strong rebound of almost 10% after gains and multiple share expansion from 18 to 20 times earnings I remain very optimistic about the stock as Cisco continues to offer a stable, growing and very solid dividend for long-term oriented dividend investors, while at the same time transforming its business and building a very solid base for future growth. Finally, Cisco is getting what it deserves and patient investors can benefit generously while earning a very attractive dividend, a simple WIN-WIN package.

What is your opinion about Cisco? Are you buying in the post-win rally or waiting for a fall first?

If you like this content and want to read more about this and other issues related to dividends, please press the " Follow " button at the top of the screen and you will be notified of the new releases. If you do not like it, I would like to know more, since I am here to learn as well.

Disclosure: I am / we are long CSCO.

I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (which is not from Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

Additional Disclosure: I am not offering financial advice, but only my personal opinion. Investors can consider other aspects and their own due diligence before making a decision.

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