Cisco Systems Inc.'s (CSCO, Financial) financials have recently begun to look more like International Business Machines Corp.'s (IBM, Financial).
On Thursday afternoon, the technology giant said that year-over-year revenue for the quarter ending in January is expected to be flat to down 2%. Regardless, that's better than the 3% decline analysts are anticipating. Earnings, excluding certain items, will be 74 cents to 76 cents a share, in the upper range of Wall Street's expectations.
Declining sales is a problem IBM has faced over the last decade as it embarked on a "creative destruction" journey: shedding older, maturing businesses and plowing resources into new emerging businesses with high growth potential. But it has yet to return to the growth it once enjoyed in its glory days.
Thus far, Cisco has avoided IBM's problem by sustaining decent revenue growth. Over the last three years, Cisco's revenue grew 6.8%, while IBM's grew around 1.2%. Cisco's current operating margins stand at 28.6%, compared to 12.33% for IBM.
| Company | Cisco Systems | IBM |
| 3-year Revenue Growth (%) | 6.8 | 1.2 |
| 3-year EBITDA Growth (%) | 8 | 2.8 |
| Current Operating Margin (%) | 28.6 | 12.33 |
| Average Annual Total Return (2010-2020) | 9.13 | 1.23 |
| Market Price | $38.27 | $114.50 |
| Intrinsic Value | $40.16 | 155.19 |
Apparently, Cisco has been pursuing a strategy IBM didn't — the acquiring and integrating of scores of other smaller technology companies, which allowed it to expand its presence into new markets.
In contrast, IBM has relied on internal resources and capabilities to expand to new markets. But this strategy takes a great deal of time to execute, undermining management's ability to deploy capital efficiently as revenue grew.
That could explain the big difference in the economic profit of the two companies.
| Company | ROIC | WACC | ROIC-WACC (Economic profit) |
| Cisco Systems | 15.42% | 5.37% | 10.05% |
| IBM | 7.10% | 5.92% | 1.18% |
Cisco's management team has acknowledged the progress it has made with this strategy.
"Our Q1 results reflect good execution with strong margins in a challenging environment," Chief Financial Officer Kelly Kramer said in a statement accompanying the financial figures released on Thursday afternoon. "We continued to transform our business through more software offerings and subscriptions, driving 10% year over year growth in remaining performance obligations. We delivered strong growth in operating cash flow and returned $2.3 billion to shareholders."
Chuck Robbins, chairman and CEO of Cisco, is also optimistic that the company will continue to execute in 2001.
"Cisco is off to a solid start in fiscal 2021, and we are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other macro uncertainties," he said. "Our focus is on winning with a differentiated, innovative portfolio, long-term growth, and being a trusted technology partner offering choice and flexibility to our customers. We see many great opportunities ahead as every company in every industry is accelerating its digital-first strategy."
Will sales from these emerging market segments be sufficient to replace revenue from it more mature businesses? That's something investors have to determine when evaluating the technology giant over the next several years.
Disclosure: I own shares of Cisco Systems.
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