CISCO: A Successful Ride against the Backdrop of the Republican Tax Reform
Riding on the wave of opportunities and optimism brought in by its growing security business and subscription software, CISCO posted strong Q2 results for the fiscal year 2018 for the period ended 27th January 2018.
Revenue Boost in Q2 2018
CISCO reported Q2 2018 revenue of USD 11.9bn, which is 3% more than the revenue posted in Q2 2017 (USD 11.6bn). What is so significant about this milestone? This year-on-year increase of 3% is the first increase that it has experienced after successive declines in the past eight quarters. The positive aspect of this increase is the glaring fact that in terms of Revenue and EPS, CISCO managed to beat the Analyst estimates.
Some recent developments that helped CISCO boost its sales growth are:
- Recent acquisition of AppDynamics and its intent to acquire BroadSoft, Inc and Skyport Systems, Inc gave a boost by bringing in recurring revenue
- Doubling their customer base to over 3,100 for Catalyst 9000 switching platform Q/Q
- Shift in concentration from core hardware to subscriptions and software
Impact on Stock Prices and Dividend Growth
Ever since the promising results of Q4 2017 was released, CISCO stock has rallied strongly. From USD 37.60 in December 2017, the prices have increased to USD 44.33 in February 2018. The stock prices are slated to grow in the future and with a strong earning upside, it looks encouraging for the broader investment community.
As a stock that provides long term dividends, CISCO has a strong dividend yield of 2.6%. After a successful Q2 2018, it increased its quarterly dividend to USD 0.33 per share which will be paid on 25th April 2018. This represents an increase of 14%, with a yield of 3.1%. CISCO is known to be a generator of cash and with a successful Q2 coupled with the Repatriation plan, the dividend payout in the future looks green.
Implications of the Tax Reform policy
Under the new tax law, companies are expected to pay 15.5% effective tax on their overseas cash and an 8% tax on their overseas illiquid assets, as against the Corporate Tax of 35% in the old policy. Out of CISCO’s USD 70.5bn cash and marketable securities, about 95.8%, or USD 67.5bn is held overseas; which will be repatriated to the US in Q3 2018.
Even though the reform meant an additional charge of USD 11.1bn, it is planning to set aside USD 25bn for shares buyback and USD 13bn for cash dividend which would be released quarterly.
Competition in the market
In terms of competition in the computer equipment industry, CISCO, with an increase of 0.25 in the stock prices, has been faring better compared to other companies. In the routers and switches business, its competitor Juniper Networks Inc saw a slight slump in its stock prices from USD 30.59 in May 2017 to USD 26.35 in February 2018. During the same period CISCO gained from USD 33.45 to USD 44.33. In terms of cloud Infrastructure-as-a-Service, CISCO is rallying strongly, however the HP Enterprise is still struggling.