Current Price: $53 Price Target: $62
Position size: 2.8% TTM Performance: +30%
Key Takeaways:
- Broad based demand growth but seeing headwinds from supply chain delays and chip shortages – supply constraints will last at least through the first half of next year and are impacting their ability to convert historically high demand into revenue. This is expected to impact the timing of revenue…causing next Q revenue to be lower than expected, but full year revenue guidance maintained.
- Taking price increases – a series of prices increases will offset impact to margins but at a lag. The increases won’t be felt for a couple quarters. Some ordering strength was likely driven by customers trying to get ahead of price increases.
- Secular drivers ramping – they are benefiting from digital transformation w/ the ramping of associated key technology transitions (Wifi 6, 5G, 400 gig, edge) that are catalysts to companies modernizing their aging network infrastructure. They’ve been investing behind these big market transitions for a long-time, they’re finally coming to life and will be long-term growth drivers for their business.
- CEO Chuck Robbins said…”The bad news is: we’ve had obviously challenges getting things shipped to our customers. The good news is: our backlog is at an all-time high for our company; it’s never been higher.”
Additional Highlights:
- Revenue was $13 billion, up 8% YoY, in line with their guidance range.
- Strongest product order growth in a decade – up 31% YoY on broad based strength across most segments, end markets and geographies.
- Supply chain issues – “snarled logistics” (ocean, air & trucking) and delayed component availability (e.g. seeing key suppliers like Fabrinet significantly adding to capacity but it takes time)…but they are starting to see signs of stabilization. For instance, memory costs are beginning to decline which suggests the market is starting to come into balance.
- They’re taking prices to offset higher costs – when all of this eases, it should be a tailwind to margins.
- Additional quotes from the call…
- On supply chain issues: “While our revenue growth was solid, it was impacted by the supply constraints which are affecting our technology peers and nearly every other industry. Our product orders were extremely strong and balanced across our markets, but we are constrained in what we can build and ship to our customers”
- “We have been taking multiple steps to mitigate the supply shortages, and deliver products to our customers, including working closely with our key suppliers and contract manufacturers, paying significantly higher logistics costs to get the components where they are most needed, working on modifying our designs to utilize alternative suppliers where possible, and constantly optimizing our build and delivery plans.”
- On inflation and price increases: “We are doing this at a breath and scale that is significantly greater than most in our industry. Of course, all these steps, while necessary to maximize our production and delivery to customers, add to our cost structure. When combined with cost increases we are seeing from many of our suppliers, these factors are putting pressure on our gross margins. While we’ve thoughtfully raised prices to offset this impact, the benefits are not immediate and will be recognized over the coming quarters.”
- Growing mix of recurring revenue should expand their multiple –Software mix is close to 1/3 of revenue w/ >80% of software sold as subscription. That means over 1/4 of total sales is from software subscriptions sales. Additionally, ~22% of rev is services with much of that from maintenance/support which tend to be recurring. Between the two, annual recurring revenue is ~42% . They have a growing “as-a-service” portfolio driving the mix shift happening w/in their business which should be supportive of their multiple and their margins. They continue to offer more products this way including Cisco Plus their new network-as-a-service offering. Their focus on subscriptions, allows them to deliver innovation faster to customers, while providing more predictability and visibility to their business over the long-term.
- Continued momentum w/ web-scale cloud providers –commentary continues to be very positive. This is an important area of growth for them. They had record performance with over 200% order growth – seeing early traction of their 400-gig solutions, a huge testament to the investments they’ve made. This is an end market where they lost share to Arista in the past, but their positioning is improving w/ new products launched last year. Their Silicon One platform which they’ve broadened from a routing focused solution to one which addresses the webscale switching market, offering the highest performance, programmable routing and switching silicon on the market.
- “the performance of the Silicon One architecture is pretty incredible, and in a world where sustainability is a massive issue for everyone. When you look at the performance to power consumption ratio, it leads the world. And so, when you look at the speed and the number of ports and the performance that we’re able to deliver at the lower power consumption, it is super meaningful. And so, not only is a great technology, but it comes at a significantly lower power consumption and I think those are couple of the big reasons.”
- Valuation: trading at a almost a 7% FCF yield on fiscal 2022, which ends in July. This is well below S&P average of ~4%, for a strong balance sheet, high FCF generative business (~30% FCF margins) w/ a growing mix of software and recurring revenue. Fundamentals continue to be supported by business transformation/digitization trends (which are accelerating) at a reasonable valuation while much else in tech has seen substantial multiple expansion. Additionally, their valuation is supported by a 2.8% dividend yield which they easily cover. They grew their dividend for the 10th consecutive year and are committed to returning 50% of FCF annually to shareholder through dividends and buybacks. They have ~$14B in net cash on their balance sheet, or >6% of their market cap.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$CSCO.US
[category earnings ]
[tag CSCO]