In the last few months, the noise of IoT has become the sweet music that has filled the tech industry and major tech titans are finding ways to participate in this revolutionary business trend. Well, it is hard to deny that IoT is a massive opportunity and therefore, it is all the more tough to just rub it off. So, since this is a big thing that has already hit the tech industry, it makes sense to analyse the prospects of Cisco (CSCO, Financial), the company that pioneered the idea of IoT, at this juncture.
The company was in news recently because of its decision to effect a massive reorganization that will see shuffling of around 25,000 employees. This shuffle will take place in company’s switching and routing division, one which contributes almost sixty percent to Cisco’s revenue. In the last few quarters, Cisco’s switching and routing business has performed below expectations and the company expects that this reorganization will help people work together and share more, making the whole company more nimble.
From okay to good
Cisco has been facing the heat for some time now, as it has constantly been unable to meet Street expectations. In the fourth quarter, Cisco’s revenue stayed flat at $12.4 billion and also, its earnings per share came it at $0.43 GAAP and $0.55 non-GAAP. CEO John Chambers, however, felt that the company delivered a strong performance, in keeping with the tough economic conditions as well as the intensifying competition in network industry. In a way, it is true as the company had had guided to a 1% to 3% decline in quarterly revenues, and so it came in ahead of its own forecast. In fact the first fiscal guidance is also optimistic in the sense that the company has guided revenue growth in Q1 to be flat to up 1% over the prior year period. This comes ahead of analyst estimates that were expecting a flat revenue growth. In terms of non-GAAP EPS, the company guided to $0.51 to $0.53, versus expectations of $0.53.
At the very beginning, I mentioned about the IoT opportunity and to make it more dramatic, it is necessary for me to point out the size that the IoT market is estimated to achieve. As this ZDNet article points out, the global Internet of Things (IoT) market is expected to grow by more than $5 trillion over the next six years, as reported by International Data Corporation. Therefore, an opportunity whose total worth is more than $7 trillion-[lus has to be an active one and true to that, the technology vendors have been at their heels to build products and solutions in alignment with IoT market needs. Well, Cisco has also been making its moves and is also optimistic on the gains from it.
The moves in IoT market
Recently, Cisco and Chinese hardware manufacturer TCL Corp. announced that they are entering into an $80 million joint venture agreement in order to invest in commercial cloud computing services in China. As per reports, Cisco will invest $16 million in the new firm, which hasn't been named yet. The firm is in the process of being registered, in which Cisco will hold a 20% stake. TCL will pay $64 million for an 80% stake, and the investments will be made over three stages. Now, this particular deal highlights Cisco’s attempt to benefit from China’s urbanization process and increasing growth in the years to come. The network giant does not have a boastful presence in this part of Asia, and investing in commercial cloud business with a Chinese counterpart might be the perfect avenue.
It is not tough to understand that cloud computing is the prerequisite for obtaining a robust positioning in the IoT market. In fact, cloud computing is extremely significant as Cisco has altered its business model or rather, sales model. Over the past few years, there has been a significant transition of Cisco's business from selling individual products and services such as routers and switches to selling them as part of integrated architectures and solutions to clients. Earlier this year, the networking giant announced that instead of selling a number of individual products, it will bundle them into four different tiers of suites and market them as Cisco ONE Essentials, Cisco ONE Foundational Elements, Cisco ONE Advanced Application Services and Cisco ONE Advanced Security Services. Therefore, in order to achieve this integrated solutions motif, it is essential to beef up cloud computing across geographies as well. With the above mentioned partnership, Cisco is readying the base for its cloud-powered collaborative systems that will immensely benefit the small and mid-sized players in China.
Bottom line
Undeniably, Cisco has been growing at a slow rate and although there are big opportunities ahead, this particular state of the company would continue for a while, as evidenced from its Q1 guidance. However, Cisco is a fundamentally strong company and a dividend aristocrat, with a yield close to 3%. Also, the recent price drops have brought the stock to trade at a forward multiple of around 10.3 as opposed to an industry average of around 13.7. As such, Cisco might be a slow mover but is an alert racer that will leverage the big opportunity in time.
