There was a lot to like following Cisco's (NASDAQ:CSCO) fiscal 2016 Q1 financial results. However, based on its more than 3% drop in share price as of this writing since announcing the news on Nov. 12, investors were obviously less than impressed.
The problem was Cisco's guidance for the current quarter. Revenue growth between 0% to 2%, and GAAP (including one-time items) earnings per share in the low $0.40 range (compared to last year's $0.46), was not favorably looked upon. Cisco's estimate of $12.17 billion in sales on the high side this quarter compared to last year's $11.94 billion underwhelmed analysts, who were expecting $12.55 billion in revenue.
Why does Cisco deserve consideration as one of the best growth-and-income stocks in tech? It's precisely because of the recent investor angst surrounding its future sales-and-earnings estimates, which increase Cisco's potential upside. Another factor will be Cisco's emphasis – and its early, impressive results -- in fast-growing markets, including the cloud, Internet of Things (IoT), and data security.
Just the facts
Expense control went a long way in boosting Cisco's fiscal Q1. Both cost of sales and total operating expenses declined, which was even more impactful given that the improved management of overhead came even as Cisco increased revenue year over year. Better still, new-ish CEO Chuck Robbins made it clear that additional cost savings are forthcoming.
Improved cost control was a primary reason why Cisco's non-GAAP (excluding one-time items) earnings per share jumped more than 9% despite a "mere" 3.6% increase in revenue. Not surprisingly, Cisco's fiscal management also positively affected gross margins, which improved to 62% compared to 60% a year ago. The leaner, meaner Cisco is great, and speaks to the kind of job Robbins is doing in his new post. But things really get interesting for investors who are looking ahead to the factors that will drive Cisco's future growth.
Three critical aspects of Cisco's plans going forward include success in the cloud, Internet of Things (IoT), and the security that each of the fast-growing markets require. In these key areas, Cisco is beginning to show some signs of life.
Cisco's Internet of Things (IoT) offerings are delivered via an open network solution, though it appears that others, including longtime networking competitor Oracle (NYSE:ORCL), offer proprietary services. The problem with a proprietary solution is ensuring that the various IoT products and services needed are compatible with third-party vendors. Assuming the expected growth in the number of IoT-related devices comes to fruition -- some estimates suggest there will be nearly 21 billion "things" installed in just five years -- an open network will quickly become a necessity.
Cisco also announced multiple enhancements to its IoT product mix last month that better position it in the Software-as-a-Service provider category. That's a good thing, too, because IoT services are expected to become a $235 billion business by next year, and outpace the revenue from device sales with each successive year.
Cisco is even further along in its cloud efforts. The fastest-growing unit last quarter was, by far, Cisco's data-center division, which increased a whopping 24%, to $859 million. What makes data center sales so critical to investors? Its improvement is largely due to the need for more enterprise-level storage solutions, thanks to the continued shift to cloud hosting.
The associated analytics required to develop actionable results from all that data sitting in the cloud is another area of rapid growth. As coincidence would have it, this is yet another improvement Cisco has made to its cloud offerings of late.
Unlike Oracle, which shared its $611 million in combined cloud software and infrastructure sales last quarter, Cisco isn't as open on its cloud data center, security, or software revenue specifics. However, Robbins did cite Cisco's improving cloud business as a key to Q1's strong showing.
Is Cisco the best growth-and-income opportunity in tech? That's tough to say, considering that companies like Microsoft are further along in their transitions to the cloud and related markets. However, for patient investors who are willing to give Cisco some time to continue growing its cloud, IoT, security and related businesses, and who appreciate the company's nearly 2% dividend yield and the fact that its trading at less than 11 times future earnings, Cisco is an inexpensive, long-term growth-and-income alternative worth a good, long look.