Key Takeaways:
· Solid results and guidance: sales and EPS beat street expectations w/ results at the low end of guidance (which was issued pre-pandemic). Guidance for the next quarter is above the street – reassuring given most companies are not even issuing guidance.
· The company is seeing tailwinds from certain aspects of the WFH environment, offsetting some diminishing order rates as Enterprise IT managers delay some investments.
· Current environment highlighting the LT story: With the world going online practically overnight, the demand on networks has never been greater. Aging infrastructure needs to be upgraded. Growing use of new technologies and increased data demand places increased importance on this.
· CEO Chuck Robbins said…”I have had a lot of customers who are not at the center of this crisis who realized during this pandemic that they have a fair amount of technical debt, and they have a lot of aged equipment. And so we don’t know what the time frame is, but many of them have said this is a wake-up call, and this is going to actually give us air cover to talk to our senior leadership team about upgrading and building out a more robust, modernized infrastructure.”
Additional Highlights:
· COVID Impact – Positives seem to be offsetting the negatives. Their business was performing ahead of its expectations through March, but began to see a slowdown in April w/ lockdowns. Despite this, the impact to Product orders was no worse than last quarter. So, coronavirus didn’t increase overall headwinds for them. This is b/c they are seeing some offsetting effects. Strength in Collaboration (especially Webex), Security, and the Service Provider business (CMTS and Routing) are offsetting softer Campus Networking sales (particularly in hard hit industries like hospitality, retail and transportation). They are mitigating the impact of some of these harder hit industries by extending credit. They announced $2.5B in financing, their “Business Resiliency Program” to support business continuity to help customers invest for recovery and defer most of the payments until early 2021. Also, they did have some supply chain disruption in the business – particularly the Infrastructure Platforms segment, but they didn’t quantify the impact on results.
· Revenue by geography/customer segment – The Americas was flat, EMEA was down 4%, and APJC was down 22%. Total emerging markets were down 21%, with the BRICS plus Mexico down 29%. Public sector was up 1%, while enterprise was down 4%. Commercial was down 11%, and service provider was down 3%. “Commercial” is SMBs. So, SMB, Asia and Emerging Markets were weakest.
· Tailwinds – remote work impact on security & collaboration demand, free WebEx 90 trials converting, improvement in Service Provider spending w/ increased network demands, growing strength w/ webscale customers, new 8K line of products moving from testing phase to implementation (not even benefiting webscale revenues yet), strength in software/service related revenues will continue to drive recurring revenue mix and margins.
· Long-term picture: The initial phase of this has been companies focusing on business continuity as people rapidly moved to WFH. That transition had the effect of exposing weaknesses in technology infrastructure. So, the focus is starting to shift from immediate virus response to preparedness for the “new normal.” This includes a variety of technologies around digital transformation and infrastructure to support them. And things like big data/machine-learning, and IoT will increase the demands on networks and thus increased investment by enterprises globally.
o “We’re working very closely with higher education because you see in the news the discussion around whether students will be on campus in the fall. As one of the heads of one of the biggest systems in the United States told me, they used anything and everything they could to get students online back in March. And now they need to go step back and actually build the real, robust, long-term architecture that they need, and we’re working with them to do that.”
o “I think telehealth is here finally. And I think that’s going to change forever. And I think that those — that industry will continue to work and build out a more robust architecture to support telehealth as opposed to what we put together as quickly as we could with them over the last few months.”
· Valuation: trading at >7% FCF yield on 2020, and we’re partway through their fiscal 2020 fourth quarter. This is well below S&P average for a strong balance sheet, high FCF generative business w/ multiple data points supportive of improving top line growth and growing mix of recurring revenue. Moreover, their valuation is supported by a 3.3% dividend yield which they easily cover.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109