Cisco Systems: A Good Opportunity To Buy?

Feb.13.14 | About: Cisco Systems, (CSCO)

Cisco Systems (NASDAQ:CSCO) is one of the strongest companies in the networking equipment manufacturing sector, based on revenues and cash flows. The company generates massive cash flows and pays substantial cash back to its investors. Despite slow growth rates in the sector, the company has been able to grow impressively, and it has been working on developing a niche and target a more lucrative segment of cloud computing. Recently, I wrote an article about the company and argued that there were no long-term concerns for Cisco - in this article, I will further look at the prospects and challenges faced by the company.

Continued Growth in Earnings

Cisco announced its earnings yesterday - despite beating the estimates, the market was not impressed by the earnings. The stock fell more than 4% in post after-hours trading. The second quarter revenue of $11.2 billion was higher than the mean estimate of $11.03 billion, and earnings of 47 cents beat the analyst estimates of 46 cents. Furthermore, the board also increased the quarterly dividend by 2 cents to 19 cents a share.

However, the reason for the fall is that the targets were quite low for the company and revenues and earnings are down by almost 8% for the year. Furthermore, cash flows are down 12% for the year. However, despite a fall in cash flows, the board increased dividends showing enough confidence in future cash flows. As I have mentioned above, the fierce competition in the industry has slowed the growth of this giant. However, I believe the slowdown is temporary and the long-term prospects remain intact. For a detailed reading of the future growth prospects, please refer to my article linked above.

Working for Better Patent Protection

Cisco recently settled a patent dispute with Innovatio IP Ventures. The firm was demanding substantial sums from networking equipment manufacturers in licensing fees. The patent firm, which Cisco officials had accused of trying to leverage $4 billion from business through the licensing demand, agreed to settle for $2.7 million, or about 3.2 cents per wireless device in dispute. Innovatio had bought some older Broadcom patents, and then targeted coffee shops, supermarkets, retailers, hotels and other businesses that were using the wireless routers and Cisco products. The firm sent demand letters asking them to pay between $2,000 and $5,000 in licensing fees.

Companies like Cisco Systems and Google (NASDAQ:GOOG) have been trying to fight against patent trolls, also called patent assertion entities, by signing cross-licensing patent deals with each other in the industry. Both Cisco and Google are part of an alliance called the Coalition for Patent Fairness that seeks to minimize litigation between technology companies and thereby devote more energy to innovation. Samsung (OTC:SSNLF), Dell (NASDAQ:DELL) and Adobe (NASDAQ:ADBE) are the other major players that have joined the coalition. Samsung has made a 10-year patent agreement with Cisco. Both companies gain access to each other's industry leading patent portfolios under the agreement, which covers a broad range of products and technologies.

Future Growth

According to the U.S. Spectrum Policy report, the volume of data crossing US mobile networks will grow almost eight fold by 2018. As a result of this massive growth in data usage, the demand for internet connected devices will certainly go up. Cisco Systems states that the usage of data will move to mobile devices, and most of the data usage will be done through mobile phones. The company predicts that U.S. mobile data traffic will reach 2.7 Exabyte a month compared with half an Exabyte of data crossed now.

The next big thing for Cisco is "Fog Computing" - It acts as a space between cloud computing and Internet of things (NYSEMKT:IOT). The IoT covers internet capable devices that include blood pressure gauges, thermometers and anything that can be monitored or measured. These devices will transfer data to nearby internet routers that are connected to the cloud server. To equip this technology in its routers, Cisco Systems plans to combine Linux with its iOS (Internetworking Operating System) to create fog computing for Cisco IoT routers, switches and IP video cameras.

Recently, Cisco Systems announced a strategic alliance with AGT International to build a smart city that will deliver the idea of IoE (Internet of Everything) derived from IoT. This alliance focuses on the idea of connecting everything via networking to build smart cities. Cisco has been working in the smart cities space for seven years, which provides services including traffic management, parking assistance, waste management, pollution reduction and healthcare. The trend of smart cities is estimated to be worth approximately $14 trillion in the next decade.

Cisco Systems has also put in $6 million in Embrane to strengthen its SDN (Software Defined Networking) division against competitors like VMware (NYSE:VMW). SDN technology is an easy way of creating layers in networking, which is user friendly. The investment in Embrane will strengthen Cisco's hold in its SDN network segment.

Conclusion

As I mentioned in my previous article, the company has nothing to worry about in the long-term. Despite slow growth rates in the sector, I see a lot of positives for Cisco - Some of these positives have been mentioned above. I believe the company is set to have an impressive year and the stock will grow substantially. The company is making strides in the SDN and cloud computing segment, which are some of the fastest growing segments of the industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.