Cisco Systems presented a vision of its growth rates over the next few years, but analysts who attended the presentation are having a hard time believing Cisco’s promising, with some arguing that the company needs to make a big M & A to make those numbers.
Shares of Cisco Systems (CSCO) fell 67 cents, or 2 percent, to $ 31.41 amid the broad market crash, as analysts pondered what they heard on the annual day of analysts’ the company. ! “Customer and partner event in Las Vegas.
Analysts had focused specifically on what Cisco would say about its revenue and profit growth, as I wrote a week ago. The big advantage is that Cisco revenue growth of 1% to 3% in the next three to five years, and EPS growth of “mid-simple digits”, but both the bull and the bear are having a time Hard to believe the prospects today.
A list of all CEO presentations Chuck Robbins and Chief Financial Officer Kelly Kramer and other executives can be found on the company’s investor relations website.
The discussion focused heavily on Cisco’s efforts to move on to selling ever-increasing amounts of software and also to move more and more customers to a subscription plan from the traditional product license.
Among the details, Kramer stated in its slide deck that the company’s software revenue should reach 30% of total revenues in 2020, up from 22% this year.
Recurrent revenues will grow by 10% per year until 2020, of which 40% of growth comes from products, the rest of services. That means a 30% annual growth in the products. Cisco aims to have more than 37% of its revenue ultimately be recurring.
Kramer said about $ 2 billion of revenue has been underwritten in nature, versus perpetual license, over the course of 2015 to 2017, equivalent to about 1.5% of the company’s total revenues . The target is to have between 2% and 3% by 2020.
Among the charitable opinions among today’s analysts was that of Pierre Farragu with Bernstein, who reiterates an Outperform rating, and a price of $ 38, when writing the perspective of growth, “this is a good floor for investor expectations “.
“Our 5 year model suggests revenue growth of ~ 2% and ~ 3% gross profit growth per year,” he writes. “We have not modeled gains on that time horizon, but we feel comfortable with a window of ~ 5-10%. For people with an upbeat bias that is mid-digit only, right?”
Ferragu thinks that Cisco was being moderate in terms of its perspective in order to “under-promise and over-deliver,” as they say:
We suspect that management guided to the lower end of our range in EPS for two very good reasons. First, revenue growth will be very low, close to zero, in the short term. Setting excessive expectations today would be unwise. Second, the expansion of gross margins will be an important factor for earnings growth, and here again, setting expectations too soon would be imprudent. As existing business lines switch to a subscription model, the gross margin profit will be retroactive, materializing when the lowest gross margin hardware is out of the mix.
Others are not as confident as Ferragu.
Jason Ader, of William Blair, reiterates an Outperform note on Cisco’s stock, writes that earnings growth prospects “are roughly in line with Street’s expectations,” but adds, “Cisco may need to undertake more acquisitions Transformers to accelerate its business model change and drive the top-line growth “.
“In any case,” he writes, “the valuation remains attractive at about 10 times the P / E adjusted for the auction on our 2018 calendar estimates, which keeps us positive on the stock “.
Nomura’s Jeffrey Kvaal reiterates a neutral rating, and a $ 29 price target, which said he “was not even convinced even by his goal of lowered growth,” after attending the event.
“We are experiencing greater confidence in Cisco’s position in its security and campus switching markets. However, we have not found the Cisco service provider or discussion on the web page too compelling. ”
Like Ader, Kvaal notes that the forecast for growth of 1% to 3% is about as expected, but “we found 0% more likely”.
Kvaal explains how he found the company’s presentation disappointing in part:
Cisco expects MS winds to reduce and eventually allow growth, although management has not specified why this would be possible. In our opinion, routing is in secular decline. This is especially true in some of the major routing markets of Cisco – enterprise and mobile routing. Juniper also sees the routing of service providers as a declining market. Cisco’s Web tone was optimistic. Over the past few years, the company has customized products for web readers and has won several inserts, including two in the spine of the data center, of which Cisco is very proud. Cisco, of course, made that statement in the past and, therefore, we are not prepared to give Cisco a takeover in the web scale. Dell’Oro continues to see that Cisco is losing its share in switching the data center, for example. Cisco posted an annual decline in commercial platform revenues over the last two quarters, despite growth of more than 25% over competitors. Cisco noted that its on-site data center activity is growing more slowly due to competition on the Web.