CSCO Stock: This Is a Big Hurdle for Cisco Systems, Inc.

cisco stockCisco Stock Struggles Through the Transition

Cisco Systems, Inc. (NASDAQ:CSCO) reported its first-quarter earnings after the closing bell on Wednesday. The company was already struggling with its turnaround efforts, but the results show that the network equipment-maker may have a bigger challenge ahead. CSCO stock was down about four percent in pre-market trade. 

The company reported earnings of $0.61 per share and revenues of $12.4 billion, which beat the analyst estimates. Data center revenue declined by three percent. Revenue from its security business rose 11%. Revenue from switching hardware declined seven percent, but routing revenue rose six percent (Source: “Cisco Reports First Quarter Earnings,” Cisco Systems Inc, November 16, 2016.)

But the company gave weak earnings and revenue guidance for its second quarter. Cisco Systems is expecting Q2 earnings per share (EPS) in the range of $0.55 to $0.57, and the company expects revenue to fall by about two to four percent year-over-year.

Cisco CEO Chuck Robbins said, “We had a good quarter despite a challenging global business environment and we performed well in our priority areas.” He further said that the company is leading its customers in their digital transitions by providing them with highly secure, automated, and intelligent solutions in the ways they want to consume them.

Cisco stock has performed well over the past year, going up by over 21% as compared to the S&P 500, which gained about eight percent.

The company seems to be clear about its need to adapt to the changing landscape, however it appears to be an uphill task. The company’s traditional businesses of switches and routers are in decline, and the high-growth areas of data center and security are still small businesses. The muted growth in the network hardware business has weighed on CSCO stock for a while now.

Sponsored Advertising Content: The 5 Top Penny Tech Stocks of 2016

With the rise of cloud services and the arrival of cheaper producers of network hardware, Cisco Systems is struggling to make the transition to being a more agile player focused on software.

Robbins cites weak demand from communications-service providers—and muted economic growth—as weighing on the company’s businesses. He is trying to shift the company’s focus to faster-growing businesses built on software and services.

This is why Cisco’s focus on cybersecurity is so important. Cisco Systems needs to grow in this segment in order to develop a constant stream of revenue. Moreover, under the upcoming Donald Trump administration, this segment is likely to do well, as companies will continue to invest in security solutions. The rise in subscriptions will contribute to the company’s revenues and buoy CSCO stock.

Cisco stock has returned around 20% year-to-date as compared to the S&P 500, which has returned around nine percent. The company is trying to shift to a software-as-a-service model, but it will take some time to get there. Meanwhile, Cisco stock is likely to remain subdued.