My Dividend Portfolio: Cisco Update

Aug.15.14 | About: Cisco Systems, (CSCO)

Summary

Cisco reported modest momentum in Q2 2014 in terms of revenue and earnings growth.

Cisco's core business units of switching and routing exhibited declines in revenues.

Cisco had encouraging growth in service provider video, data center and wireless business units.

I continue to remain positive on Cisco and hold the stock in my dividend portfolio.

Cisco (NASDAQ:CSCO) delivered an encouraging result in Q2 2014 as far as growth in its emerging businesses and continues to provide positive validation to my decision to include it within my dividend portfolio.

Market Opportunity

The central thesis behind my decision to include Cisco within my dividend portfolio is that Cisco fulfills a core role as an internet traffic cop, in providing core router and switching technology to Service Providers, enterprises and Internet Service providers. The fact that Cisco is selling routers, switching equipment and cloud solutions into enterprise markets creates a far stickier customer with higher switching costs than in its consumer business. My full analysis of Cisco can be found here.

Revenue and profit growth

Revenue came in at $12.4B, a slight 0.5% decline from 2Q 2013, however, revenue exceeded most analyst expectations. Cisco also reported better than expected earnings with profit of $0.43 per share, also exceeding most analyst expectations.

Core routing and switching declines

The story of Cisco's earnings for Q2 is a continuation of themes that have been prevalent for the last few quarters. Pricing pressure from low-cost competitors in Asia have produced declining revenues in switching and routing. Cisco has been increasingly caught in a fairly bruising battle in international markets with Huawei. Huawei has made significant inroads in emerging markets selling low end routers and switches. Huawei has increasingly also been moving into more sophisticated and advanced markets such as the service provider space.

Cisco's switching revenue declined 2.8%, while NGN routing revenues declined 4.9%. These segments contribute 29% and 17% of revenues to Cisco, respectively. It's in emerging markets where Cisco had struggles again, with growth in China down 30% and other emerging Asian markets down some 23%.

Service provider video, data center growth

My continued belief is that Cisco's future is in video and the cloud.

Video traffic accounts for close to 50% of traffic going across mobile networks today among US operators. Cisco offers solutions in the core operator network that allow transrating and transcoding of video content. Cisco also offers compelling solutions for data center virtualization and networking. Cisco virtualization solutions allow data centers to better optimize existing computing power to deliver data to customers as needed.

Cisco had strong growth in these emerging market segments. Service provider video, data center and wireless all displayed material revenue growth, up 8%, 29% and 23%, respectively. While promising growth was evident in these key segments, segment contribution still remains small, with service provider video contributing 8% of total revenue, data center contributing 6% of revenue and wireless 5% of revenues.

Conclusions and Key Takeaways

Cisco continues to experience modest product revenue declines in Asian markets for core routing and switching product. Strong growth is evident for emerging product lines, which should act to stem revenue declines. Near-term product releases will continue to be of importance, particularly those in the enterprise cloud and SDN space.

Disclosure: The author is long CSCO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.