After Cisco (NASDAQ:CSCO) posted stellar Q2 results on Feb. 11, shareholders have enjoyed a nice jump in share price. Cisco's stock is bumping up against its new 52-week high on an almost daily basis, and Cisco is continuing to return value to shareholders as demonstrated by its solid dividend yield. A nice way to kick off the new year, to be sure.
Despite its giddy shareholders, Cisco faces a number of challenges in 2015. Analysts certainly recognize those challenges, as evidenced by Cisco's consensus price target of $30.26 a share, slightly above its current stock price, and little-changed from estimates leading up to Cisco's earnings. That said, there are several areas of focus that if addressed, should keep analysts and investors cheering in 2015.
A lean, mean tech machine
The primary reason Cisco was able to improve non-GAAP (excluding one-time items) earnings-per-share by nearly 13% last quarter, though its $11.9 billion in revenue was only 7% better than the year-ago quarter, was Chambers and team's efficient management of expenses. Though Cisco generated just shy of $800 million more in revenue in Q2 2015, its total operating expenses inched up a mere $184 million.
Cisco also posted outstanding results for gross margin and boosted quarterly operating income by almost $1 billion, to $2.6 billion. New Cisco CFO Kelly Kramer summed up Q2's operations nicely, saying, "This was a good quarter to start as CFO." There are still concerns about growing Cisco's top line, so you can bet CEO John Chambers and Kramer will keep their laser-like focus on maintaining its streamlined operations.
About that top line
If there's a chink in Cisco's armor, it's relatively anemic sales growth. Cisco's efficient operations drove strong earnings, but a 7% increase in revenues last quarter, combined with an expected mediocre 5% year-over-year improvement in the current quarter, is only so-so, at best.
So, what's a networking giant to do? There are a couple of avenues to pursue to help drive sales, and they both speak to Cisco's plans to become a leader in new markets. One is the Internet of Things, or IoT, the other is cloud-related solutions: two markets with seemingly unlimited upside.
While cloud-related Software-as-a-Service gets much of the ink when discussing market projections -- it's expected to generate over $100 billion in revenue in 2016 -- growth in cloud infrastructure and platforms used to support those services is also exploding. According to a recent report, cloud infrastructure sales will grow 30% annually through 2018. This explains Cisco's outstanding server sales growth.
In calendar Q3 of last year, Cisco made a dent in server sales leaders Hewlett-Packard's (NYSE:HPQ) and IBM's (NYSE:IBM) commanding market leadership. Though HP and IBM still dominate, neither behemoth could match Cisco's year-over-year 30.8% increase in server revenues. In fact, both actually declined. Chambers' emphasis on cloud data center and security is paying off, and investors can expect more of the same.
Another growth opportunity
Along with cloud infrastructure, another key component of Cisco's future is IoT -- specifically the proliferation of "smart cities." Though acceptance in the U.S. is anemic, cities around the world are on board. And with each successive quarter, Cisco announces yet another smart city deal, as it did in Q2 by bringing Santiago, Chile into the fold.
The agreement with Santiago, Chile follows deals with Berlin and Hamburg, Germany, among a host of others. Cisco also announced its new IoT "Innovation Center" in Tokyo last quarter. Like cloud infrastructure, smart cities are expected to become a huge market -- one forecast suggests as much as $1.5 trillion over the next 10 years. Sure HP, IBM, and others recognize the potential, but Cisco is at the forefront.
What's mine is yours
Unlike some tech leaders, Cisco takes care of its shareholders, and that will continue. Not only did Cisco raise its already strong $0.19 quarterly dividend to $0.21 -- pushing its yield up to 2.85% -- its ongoing share buyback initiative included another $1.2 billion last quarter. Over time, Cisco plans to buy back another $6.3 billion in shares.
The increased dividend and share buybacks are part of Cisco's commitment of "returning at least 50% of our free cash flow annually." That kind of shareholder-first mentality speaks volumes about Cisco management, and won't change anytime soon. No doubt, there's a lot on Cisco's plate, but if Chambers and team can execute their plans in these key areas, shareholders can expect a strong 2015.