Cisco Systems (NASDAQ:CSCO) posted fiscal second-quarter results in line with guidance, which means revenue dropped 4% year over year. In addition, management forecasted revenue to decline again during the next quarter. Yet it increased the dividend because it believes this negative trend would not last. Here are the key takeaways that should give investors the same confidence as management about the tech giant's medium-term potential.
Short-term revenue decline
Cisco's fiscal second-quarter revenue decline to $12.0 billion is the result of two opposite trends. Thanks to the strength of its cybersecurity applications Duo (multi-factor authentication) and Umbrella (cloud-based security), revenue from Cisco's security segment increased by 9% year over year to $748 million.
But the company's two other main segments -- infrastructure platforms (core networking technologies such as switching, routing, and wireless products) and applications -- more than offset that strong performance, decreasing by 8% each to $6.5 billion and $1.3 billion, respectively.
The effect of the tech giant's applications segment remains limited since it represented 11.2% of revenue during the last quarter. Yet the 8% drop in that segment because of the weak performance of the company's unified communications applications such as Webex remains worrying.
CEO Chuck Robbins expressed confidence in the strength of the company's portfolio in this area. But these types of applications are facing intensifying competition from high-growth cloud-based communications specialists. For instance, during their last quarter, RingCentral and Zoom Video Communications increased their revenue by 34% and 85% year over year, respectively.
In contrast, the poor performance of Cisco's infrastructure platforms segment seems less concerning. Management discussed during the earnings call that this softness was due to macro uncertainties that should diminish. The 11% drop in revenue from service providers also contributed to that decline, but the situation will change with the ramp-up of 5G investments. So far, service providers have been delaying their deployments of 5G infrastructures, prioritizing the installation of 5G antennas that are compatible with their existing 4G core networks.
In addition, some other emerging technologies such as Wi-Fi 6 (the latest norm for high-performance wireless networks) and 400G (high-speed networks) should also boost revenue from Cisco's infrastructure platforms segment over the next several years.
Margins stay high
Despite its declining revenue, Cisco maintained strong margins, and next-quarter guidance indicates this trend should continue. Gross margin increased to 64.7% during the last quarter, up from 62.5% a year ago, which suggests Cisco's pricing power remains intact. The company's shift from hardware to software also contributed to higher gross margins.
And as a result of stable operating expenses as a percentage of revenue, operating income under generally accepted accounting principles (GAAP) increased by 5% to $3.4 billion, which corresponds to an impressive operating margin of 27.5%.
An opportunity for dividend investors
Management expects next-quarter revenue to decline in a range of 2.5% to 3.5%. Yet it raised the quarterly dividend by 3%, from $0.35/share to $0.36/share. But the dividend remains safe. The trailing-12-month free cash flow and GAAP net income of $11.4 billion and $11 billion, respectively, both largely cover the $6.1 billion cash outflow the increased dividend involves.
Besides, Cisco should at least sustain its profits thanks to the multi-year tailwinds technologies such as 5G, 400G, and Wi-Fi 6 represent. And the cash on the balance sheet at $11.1 billion, net of debt, represents an extra safety net.
With the drop in the stock price below $48, the dividend yield crossed the 3% threshold again. And given Cisco's reasonable forward P/E ratio below 15, the decline in the company's stock price because of short-term challenges provides an opportunity for long-term dividend-oriented investors to consider adding this tech stock to their portfolios.