Cisco's Q2 Product Orders Return to Positive Growth

Narrow-moat Cisco Systems CSCO performed well in the second quarter in our view, with revenue of $12 billion remaining flat year-over-year and adjusted earnings of $0.79 increasing by $0.02 annually. Total product orders increased by 1% year over year after posting five sequential quarters of contractions, and all major product segments saw improved annual growth rates. We believe that Cisco is navigating the pandemic well by finding pockets of strength while efficiently managing costs. Cisco sees encouraging signs of recovery across its customer verticals and expects to return to growth in the third fiscal quarter. We view Cisco’s quarterly dividend increasing by $0.01 to $0.37 in April as a sign of balance sheet and cash flow confidence. Cisco is aptly positioned as organizations upgrade their IT infrastructures and will prudently exhibit cost controls for a resilient operating profile, in our view. We are maintaining our $48 fair value estimate and see shares as fairly valued.

Infrastructure products, the segment most impacted by the pandemic, declined by 2% year over year. Switching was flat, but Cisco had very strong momentum within the hyperscale data centers building out 400Gb infrastructure and the webscale customers now make up about 25% of Cisco’s service provider revenue. Routing was down due to service provider weakness, wireless had strength due to Wi-Fi 6 demand, and servers declined. Applications were flat year over year, as strength with WebEx was offset with continued weakness in unified communications and telepresence endpoints. Security grew 10% year over year with broad-based strength from firewall to identity to cloud protection. Services expanded 2% year over year.

Guidance for the third fiscal quarter includes 3.5%-5.5% annual revenue growth and non-GAAP EPS of $0.80-$0.82. The targets include an extra week of results, and revenue would be about 2%-3% lower without the extra week, still indicating growth.

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