On Nov. 13, Cisco Systems (CSCO +2.15%) reported its fiscal first-quarter earnings for 2020. While the quarter itself was slightly ahead of already lowered consensus estimates, guidance for the second quarter disappointed.
Cisco has been transitioning its business model to more of a software as a service (SaaS) mix. And over the past few quarters, this strategy appeared to be gaining traction. Revenues have grown for the past eight quarters and the stock price climbed from the mid-$30s to a high of $58 per share in mid-July. But now Cisco has disappointed for two straight quarters. So let's take a closer look at Cisco's recent quarter and see if the 23% swoon in the stock price over the past few months presents long-term investors with a buying opportunity.
Revenue growth despite broad headwinds
Cisco, for the second straight quarter, identified a "challenging" macro environment. Revenues grew 2%, operating margins expanded 130 basis points, and net income grew 5%. Earnings per share increased 12% as Cisco bought back a massive amount of stock over the past year (more than $20 billion or over 7% of its shares outstanding). Despite the revenue growth, orders in the quarter fell 4%, indicating trouble ahead.
For the second fiscal quarter, Cisco is guiding a 3% to 5% decline in year-over-year revenues. It's the first decline in year-over-year revenue growth in a few years and the slowdown was broad-based, according to management. More specifically, Cisco said customers seem to be taking a 'pause', deals are being downsized, and sales are taking longer to close. Cisco attributed the slowdown to increasing global uncertainty citing a host of global headwinds including Brexit, Hong Kong protests, China-U.S. trade tensions, Latin America unrest, and the upcoming presidential elections. In addition, service providers, typically large customers for Cisco, are focused on building out the consumer 5G experience first. Cisco will benefit when these giants turn their focus to enterprises, which Cisco doesn't expect to happen until the second half of 2020.
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Importantly, Cisco is not the only networking gear provider experiencing the slowdown. Arista Networks (ANET +2.37%), one of Cisco's competitors, issued weak guidance earlier this month. Last month, Juniper Networks (JNPR +0.00%) said "service provider spending remains challenged" and it "experienced weaker than expected enterprise orders in the September quarter." This lends credibility to Cisco's argument that its not experiencing market share losses, but an overall deterioration in the global business environment.
A strong balance sheet and cash flow provide down-side support
Cisco, despite spending $20 billion on share repurchases over the past year, is still in a net cash position on its balance sheet. Total debt stood at $18.5 billion versus cash and investments worth $28.0 billion. That equates to around $2.23 per share in net cash, or roughly 5% of the stock price is in cash. This means that Cisco has ample financial flexibility through adding debt, should it decide to use it. On top of the strong balance sheet, Cisco generated almost $15 billion in free cash flow last fiscal year with dividends only consuming about 40% of that total.
Consensus earnings estimates for fiscal 2020 are $3.25 per share, indicating that Cisco trades today for just below 14x fiscal 2020 earnings. Given expectations of earnings growth in the 5% range over the next couple of years coupled with a reasonable multiple, near-term uncertainty around top-line growth, and only a 3.1% dividend yield, investors should be in no rush to take advantage of the recent rout in Cisco's stock price.
