Cisco Systems, Inc. (NASDAQ: CSCO – $47.69) is a worldwide leader in communications equipment. The San Jose, California-based company provides protocol-based networking and other products for transporting data, voice and video across geographically dispersed local-area networks, metropolitan-area networks and wide-area networks. Devices are primarily integrated by Cisco IOS Software and include a broad range of routers and fixed configuration and modular switches. Founded in 1984, Cisco also manufactures storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers. It serves commercial businesses of various sizes, public institutions, governments and Internet service providers. The company sells its products directly, as well as through channel partners, such as systems integrators, ISPs, other resellers and distributors.
Cisco is making progress in its transition to a more software-centric business model. Around 32% of revenue in fiscal 2018 was recurring, an increase of two percentage points from a year earlier. Further, revenue from subscriptions was 55% of software sales. The bundling of software with its flagship Catalyst 9000 switch appears to be helping here. Importantly, the Catalyst 9000 has become the fastest selling product introduction in Cisco’s history. The company is also moving into data security in a big way and will be an important profit center in the years to come. Very public and concerning cybersecurity breaches in recent years have increased demand for preventative measures. Cisco’s security business saw sales rise 11% in the fiscal fourth quarter and the company is trying to differentiate itself by using artificial intelligence and machine learning to cut detection time.
Total revenue for the fiscal year ended July 2018 was $49.33 billion, up from $48 billion last year. For fiscal 2019, revenue should be in the $50.5 billion range, of which about 41% is derived from foreign sources. The company earned $2.59 per share in 2018 and the current fiscal year should see adjusted earnings of close to $3.00, providing the shares with a reasonable projected price-earnings ratio of 16. Cisco’s $46 billion in cash, should allow for continued share buybacks, increased dividend payouts and strategic acquisitions. The well-covered dividend has increased 48% over the past five years and the current annual rate is $1.32 per share, yielding 2.7%. I see multiple positives in Cisco’s outlook, including rapid growth in Catalyst 9000 and its Campus LAN systems; increasing contribution from recurring revenue sources; rising revenue percentage in subscription software; entry into cybersecurity; improving profit margins; and exceptional cash flow. In summary, I believe positions in CSCO should provide conservative income investors with above-average long-term total returns.