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Cisco’s Stream of Acquisitions Unable to Counter China Concerns

Posted on Tuesday, Aug 20th 2019

President Trump’s recently introduced tariff hikes against China have begun to hurt the US stock market. Recently, networking giant Cisco (Nasdaq: CSCO) reported its quarterly results. While the reported quarter’s performance outshone market expectations, the outlook was a big disappointment. The company blamed the low outlook on the growing trade concerns with China.

Cisco’s Financials
Cisco’s Q4 revenues grew 6% over the year to $13.4 billion, marginally ahead of the Street’s forecast of $13.39 billion. Net income fell to $2.21 billion, or 51 cents per share. Adjusted EPS was $0.83, ahead of the market’s estimate of $0.82.

By segment, infrastructure platform revenues grew 6% to $7.9 billion, Applications revenues climbed 11% to $1.5 billion, and Security products grew 14% to $0.7 billion. Service revenues grew 4% to $3.3 billion driven by growth in software and solutions services. Revenues from other products declined 4% to $42 million. Cisco has been focusing on driving subscription-based revenues, and for the fourth quarter, subscriptions accounted for 70% of its software revenue.

By region, revenues from the Americas grew 9% over the year and EMEA increased 7%. Revenues from APJC decreased 4% and from the emerging markets declined 8%. Revenue from BRICs and Mexico combined declined 20%.

Cisco ended the year with revenues growing 7% to $51.7 billion and an EPS of $2.61.

For the current quarter, Cisco forecast revenue growth of 0%-2%, translating to a mid-point estimate of $13.2 billion with an EPS of $0.80-$0.82. The Street was looking for revenues of $13.4 billion with an EPS of $0.83.

Cisco’s Acquisitions

During the quarter, Cisco continued to acquire other smaller players into its portfolio. Earlier last month, it announced plans to acquire Acacia Communications ACIA, an optical networking technology company, for an estimated $2.6 billion.

Founded in 2009, Acacia develops, manufactures, and sells high-speed coherent optical interconnect products. Its embedded and pluggable module products include optical interconnect modules with high transmission speeds. It develops algorithms for digital signal processing along with technology for ASIC design and verification, software, integration, and optics optimization.

Cisco expects the acquisition to be completed in the second half of next year. Prior to the acquisition, Acacia had raised $23 million in private funding rounds and $103.5 million through its IPO in 2016. It was valued at $1 billion at the time of its IPO. For fiscal 2018, Acacia had reported revenues of $339.9 million with a net income of $4.9 million. Cisco plans to leverage Acacia’s technology to improve its optical systems portfolio and to allow its customers to transition from chassis-based systems to pluggable technology to simplify operations and reduce network complexities.

To further enhance its IoT security and management offerings, Cisco also announced plans to acquire France-based Sentryo, for an undisclosed sum. Sentryo develops and provides cyber security and situation awareness solutions focused on industrial networks and the IoT market. It offers asset inventory, network monitoring and threat intelligence platform along with network edge sensors as part of its security portfolio.

The acquisition will help Cisco improve its security device visibility and provide control systems engineers with the ability to optimize and secure their industrial networks. Prior to the acquisition, Sentryo had raised €12 million (~$13.3 million) in three funding rounds at an undisclosed valuation. Its annual revenue is estimated to be $3.5 million.

Earlier this month, Cisco announced the acquisition of Voicea, a voice collaboration platform, for an undisclosed sum. Founded in 2016, Voicea is known for its Enterprise Voice Assistant, an intelligent meeting facilitator that helps people manage their meetings by making them searchable, taking notes of decisions, and encouraging follow-up on action items. It integrates AI and speech recognition to drive its technology.

Cisco plans to integrate Voicea’s technology with its Webex portfolio to offer a powerful transcription service and to drive enterprise collaboration. Prior to the acquisition, Voicea had raised $20 million in funding and is estimated to be operating at an annual revenue run-rate of $3 million.

Cisco’s Weak Outlook

The big concern for Cisco’s results though, was its outlook. During the earnings call, the management called out China as a big concern. China accounts for 3% of its quarterly revenues. Cisco has been selling infrastructure to large carriers in China, which has been slowly declining. But the recent changes are accelerating the decline. Cisco reported a 25% decline in China’s market during the last quarter. Cisco is no longer being invited to bid for state-owned enterprises, and the trade war is impacting its sales of switches, routers, security, and Meraki products. Cisco has been moving some hardware manufacturing to others countries.

The company’s weak outlook sent the stock tumbling. It reported its biggest single-day decline in nearly 6 years. The stock fell 9% in the after-hours trading session. Its stock is currently trading at $46.96 with a market capitalization of $201 billion. It had climbed to a 52-week high of $58.26 last month. The stock has recovered from the 52-week low of $40.25 that it had fallen to in December last year.

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