Cisco's (CSCO 0.04%) stock recently popped after the networking hardware and software leader posted its first-quarter numbers.
Its revenue declined 9% year over year to $11.9 billion, beating estimates by $80 million but marking its fourth straight quarter of declining sales. Its adjusted net income fell 11% to $3.2 billion, or $0.76 per share, but also topped expectations by six cents.
For the second quarter, Cisco expects its revenue to decline 0%-2% and for its adjusted earnings to dip 1%-4%. Analysts had expected its revenue and adjusted earnings to decline by 3% and 5%, respectively.
Does that better-than-expected forecast suggest that Cisco, which trades at just 13 times forward earnings and pays a forward yield of 3.5%, is an undervalued dividend stock?
Cisco's core business is still weak
Cisco generated 53% of its revenue during the quarter from its infrastructure platforms segment, which sells routers, switches, and other networking hardware. This core business has struggled over the past year due to sluggish data center and campus upgrades, intense competition, its loss of Chinese contracts, and COVID-19 disruptions.
Cisco is still the world's top producer of routers and switches, according to IDC, but its lead is shrinking as it faces stiff competition from Huawei, Arista Networks (ANET 0.40%), HPE, and Juniper.
It also faces secular challenges from software-defined networking (SDN) and generic "white box" hardware. SDN setups require less hardware and rely more on software services, while white box hardware is cheaper and compatible with open-source software. Arista, for example, even plans to render traditional routers obsolete with a combination of software-optimized switches and cloud-based software.
Cisco's sales of Cat 9K switches, Wi-Fi 6 products, and Meraki cloud-based platforms -- which help customers deploy secure and scalable networks -- remained resilient during the quarter. Unfortunately, stable sales of those newer products still couldn't offset its softer sales of older networking products.
As a result, Cisco's infrastructure revenue tumbled 16% year-over-year. But on the bright side, Cisco expects the business to gradually recover as the pandemic passes and enterprise customers upgrade their networks to address the rising bandwidth needs of 5G, AI, and cloud services.
Webex fails to save the applications business
Cisco's applications unit, which generated 12% of its revenue, houses its Unified Communications platform, telepresence endpoint solutions, Webex video conferencing platform, AppDynamics platform for IT diagnostics, and other services.
Webex was the business' core growth engine during the quarter as its total number of meeting participants almost doubled between March and October to nearly 600 million. That expansion isn't surprising, since Webex's top rival Zoom Video Communications (ZM -0.18%) also generated explosive growth over the past year as the pandemic forced more people to stay at home and rely on video conferencing.
Unfortunately, Webex's growth didn't offset the declining demand for Cisco's Unified Communications and telepresence endpoint products, which are primarily deployed in offices. That pressure caused Cisco's applications revenue to decline 8% year over year, but its sales could improve after more people return to work.
The security business is still growing
Cisco's security business, which it expanded over the past decade with more than a dozen acquisitions, was its only growing product segment. It typically bundles those security services with its hardware and applications.
Its security revenue rose 6% year over year and accounted for 7% of its top line, as its Duo and Umbrella cloud-based security platforms posted "double-digit growth." It attributed that growth to a shift to remote work during the pandemic, which required companies to secure remote workers with cloud-based security services.
Cisco has also deployed a new "simplified" security platform, SecureX, across over 4,000 organizations since its launch in June. The ongoing growth of Cisco's security business could strengthen its hardware and software bundles, boost its sticky subscription revenue, and widen its moat against its competitors.
Should we consider Cisco a cheap dividend stock?
Cisco started paying a dividend back in 2011, and it's raised its payout every subsequent year. Over the past 12 months, it spent 40% of its free cash flow on its dividend, which gives it plenty of room for future hikes.
If Cisco's outlook for the second quarter proves accurate, its revenue and earnings growth could accelerate in the second half of fiscal 2021. Its deferred product revenue -- a key metric for future demand -- hinted at that recovery with 15% year-over-year growth during the first quarter. Analysts expect Cisco's revenue to dip 1% this year before rising 4% next year.
Cisco expects its gross margin to decline sequentially in the second quarter, but it plans to cut costs to stabilize its operating margin and continue repurchasing shares to boost its EPS. Based on those factors, analysts expect Cisco's EPS to dip 2% this year but rebound 7% next year.
Those forecasts all suggest Cisco's business will gradually stabilize. This mature tech stock won't take off anytime soon, but its low valuation should limit its downside potential as its high yield attracts more income investors.