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Cisco Systems (CSCO) the world’s largest provider of high-performance computer networking equipment, designs and sells a broad range of technologies that power the Internet. Cisco offers integrated platforms across networking, security, collaboration, applications, and the cloud. These platforms are designed to help customers manage more users, devices, and things connecting to their networks while providing a highly secure, intelligent platform for digital business.
 

Market Leader

Cisco Systems was founded in 1984 by a group of computer scientists at Stanford University. Husband and wife, Len Bosack and Sandy Lerner, both working for Stanford University, wanted to email each other from their respective offices located in different buildings but were unable to do so due to technological shortcomings. A technology had to be invented to deal with disparate local area protocols. As a result of solving this challenge, the multi-protocol router was born. Since its inception, Cisco has shaped the future of the Internet and has become the worldwide market leader in networking with sales topping $51.5 billion in fiscal 2022.

Amid robust competition and a rapidly changing technological landscape, Cisco is transforming its offerings to meet the evolving needs of its clients. This transformation, which is progressing well, includes shifting the business from selling network switches and routers to more software and subscriptions. During the first quarter of fiscal 2023, 43% of Cisco’s revenue was derived from recurring software and services.
 

Strong Free Cash Flow

Cisco’s strong free cash flow has enabled it to provide generous cash returns to shareholders while making investments to capitalize on long-term megatrends like hybrid cloud and work, security, the Internet of Things, high-speed ethernet, 5G, and WiFi 6. In fiscal 2022, Cisco generated $12.8 billion in free cash flow, representing more than 100% of reported earnings, a sign of high-quality earnings. The company used the cash to return nearly $14 billion to shareholders through share repurchases of $7.7 billion and dividends of $6.2 billion.

During the past five years, Cisco has repurchased nearly $52 billion of its shares, thereby reducing its share count by 11%, while investing nearly $13 billion in acquisitions to fuel growth. In fiscal 2022, the company increased its dividend for the 11^th consecutive year and remains committed to returning at least 50% of free cash flow to shareholders annually even as it transforms the business.

During the first quarter of fiscal 2023, Cisco generated a free cash flow of $3.8 billion, up 15% from last year with the company paying $1.6 billion in dividends and repurchasing $556 million of its common stock at an average price of $43.76 per share. Cisco ended the quarter with $19.8 billion in cash on its strong balance sheet and $14.7 billion in stock repurchase authorization.
 

First Quarter Results

During the first quarter that ended 10-31-22, Cisco reported revenues increased 6% to a record $13.6 billion with net income decreasing 10% to $2.7 billion and EPS down 7% to $.65. Software revenue grew 5% year-over-year and software subscription revenue grew 11%. Annualized revenue from recurring contracts of $23 billion increased by 7%. Cisco ended the first quarter with a remaining performance obligation (RPO)—a reliable indicator of future growth—of nearly $31 billion, up 3% year-over-year. The backlog remains elevated at near-record levels.

Given the strong first quarter results, a significant backlog, strong RPO, and easing supply constraints, management raised guidance for fiscal 2023. Management expects second-quarter revenue growth of 4.5% to 6.5% and EPS to be in the range of $.59 to $.64. For the full fiscal year, Cisco now expects revenue growth of 4.5% to 6.5% and EPS to be in the range of $2.63 to $2.76.
 

Attractive Valuation

Deducting Cisco’s copious cash from its stock market capitalization, Cisco trades at an attractive valuation of just over fifteen times trailing earnings with a generous 3.2% dividend yield. Long-term investors should seek to network with Cisco Systems, a high-quality market leader with strong free cash flows, a substantial share repurchase program, and an attractive dividend yield. Buy.

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