Veteran tech titan Cisco Systems (CSCO -0.50%) may have started as a networking company, supplying the necessary hardware to enable communication between computers, but through a number of acquisitions over the years, the company has evolved to encompass an array of digital services. These include video conferencing, IT systems monitoring, and cybersecurity.
Its latest purchase is cybersecurity analytics firm Splunk (SPLK) for $28 billion, Cisco's largest acquisition to date. After the news was announced on Sept. 21, Cisco's stock price dropped, creating a potential buy opportunity.
But does adding Splunk to its suite of software offerings provide Cisco with future upside, or is the deal a reason to avoid the networking giant? For the answer, let's look at both companies.
Insights into Splunk
First, why did Cisco purchase Splunk? The latter provides data analytics and monitoring for IT infrastructure to identify potential problems, such as the signs of a cyberattack. These capabilities fit into Cisco's stated strategy to "securely connect everything."
Now that businesses are shifting IT infrastructure toward cloud computing, a secure, reliable network is increasingly important. Splunk's monitoring technology enables Cisco to transition its customers "from threat detection and response to threat prediction and prevention," as Cisco CEO Chuck Robbins put it.
Splunk seems to offer a compelling complement to Cisco's existing software solutions. But what does this acquisition mean for Cisco's financials, aside from the $28 billion price tag?
Looking at Splunk's performance in its fiscal second quarter, ended July 31, the company achieved $910.6 million in sales, up from the prior year's $798.8 million. This is the latest in a trend of rising revenue in recent years.
Data by YCharts.
Splunk expects its 2024 fiscal year, which ends Jan. 31, to continue this trend with at least $3.93 billion in revenue, up from $3.65 billion in fiscal 2023, and an increase from Splunk's original 2024 guidance of at least $3.85 billion. In addition, through its fiscal Q2, Splunk generated free cash flow (FCF) of $805 million over the trailing 12 months, a jaw-dropping 273% year-over-year (YOY) increase.
Cisco's recent performance
Splunk's revenue growth will deliver a needed boost to Cisco's business. At the low end of its guidance, Cisco estimates its fiscal 2024 YOY revenue growth will be flat compared to 2023.
However, Splunk isn't profitable, exiting fiscal Q2 with a $63 million net loss. So Cisco will likely trim costs after the acquisition closes at around the third quarter of next year.
Cisco's muted revenue forecast for fiscal 2024 makes sense when you consider the company's typical YOY growth rate versus the outsize sales it enjoyed in fiscal 2023, which ended July 29. Cisco wrapped up its 2023 fiscal year with record revenue of $57 billion, up 11% YOY. This was a dramatic jump from fiscal 2022's 3% YOY sales growth.
Data by YCharts.
Cisco's 2023 revenue was boosted by new products designed to help clients manage the large, complex data sets and applications required for artificial intelligence software. This added to an improvement in supply chain constraints for Cisco's hardware business, propelling revenue growth.
The verdict on buying Cisco shares
Moreover, Cisco is a profitable business generating substantial FCF. The company exited fiscal 2023 with net income of $12.6 billion, up 7% from 2022, and FCF of nearly $20 billion, an astounding 49% YOY increase.
The company's balance sheet is rock solid as well. Cisco exited fiscal 2023 with $26.1 billion in cash, cash equivalents, and investments as part of $101.9 billion in total assets, while total liabilities were $57.5 billion. It's no wonder it can afford Splunk.
Thanks to its strong FCF generation and excellent financials, Cisco pays a dividend, currently yielding nearly 3%. The company possesses a good track record of dividend increases, having raised its dividend for 13 consecutive years.
Cisco also spent the last few years growing its software-as-a-service (SaaS) sales. Doing so gives Cisco reliable recurring revenue. In fiscal 2023, the company saw its software sales increase 12% to $17 billion.
With Splunk, Cisco can boost this recurring revenue stream and strengthen its cybersecurity and network observability offerings. Cisco's healthy balance sheet, plenty of FCF, and a reliable dividend add up to it being a solid income stock. These factors make Cisco a buy, and its acquisition of Splunk should only help.
