Despite Five Straight Down Quarters, Wall Street Is Still in on Cisco

Fortune Brainstorm TECH 2016
Fortune Brainstorm TECH 2016 WEDNESDAY, JULY 13TH, 2016: ASPEN, CO 9:00 AM A NEW MODEL FOR CONNECTIVITY Chuck Robbins, CEO, Cisco Interviewer: Andrew Nusca, Senior Editor, Fortune PHOTOGRAPH BY STUART ISETT/Fortune Brainstorm TECH
Stuart Isett—Fortune

Wall Street seems to still have faith in Cisco, even though the networking giant suffered its fifth straight quarter of overall sales declines.

Although Cisco’s quarterly revenue dropped 2% year-over-year to $11.6 billion, the company managed to beat expectations, reporting earnings of 57 cents per share, enough to outperform the analyst-projected 56 cents per share. Cisco’s second quarter ended on Jan. 28.

In after-hours trading, Cisco’s shares were up 2% to $33.49, continuing the upward trend for the company’s stock price that began in January when it said it planned to buy business software monitoring startup AppDynamics for $3.7 billion.

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On a Wednesday earnings call with analysts, Cisco CEO Chuck Robbins said that roughly 75% of AppDynamics’s revenue is subscription-based. This fits with Cisco’s “strategic objective” of shifting to a more subscription-centric business, in which the company would sell software services like data analytics and cybersecurity features.

And Cisco (CSCO) clearly needs to sell these newer software subscription services, because its legacy switching and routing businesses continue to drop. The switching unit declined 5% year-over-year to $3.3 billion in the second quarter, while its routing business sank 10% year-over-year to $1.8 billion over the same timeframe.

Judging by the rising stock price—despite its core business continuing to fall—Wall Street seems encouraged that the AppDynamics deal could spark some life back into the company that nearly 17 years ago was the most valuable business in the world.

Cisco Acquired AppDynamics for $3.7 Billion at the Last Minute

When asked by analysts what types of people Cisco wants on its management team to improve its business, Robbins pointed to AppDynamics CEO David Wadhwani who will remain with Cisco after the acquisition. He said that Wadhwani, before he joined AppDynamics in 2015, helped Adobe adopt a software-subscription model during his time as an Adobe executive. Adobe, like other legacy enterprise software companies, once relied on only selling traditional software licenses in which reoccurring sales were more difficult to predict.

And it’s likely Cisco will continue to make big acquisitions as the new year unfolds, Robbins hinted, regardless of whether President Donald Trump follows through on his campaign promise regarding repatriation. U.S. companies could potentially bring back large amounts of their overseas cash back to America if they don’t get taxed as much under Trump’s proposal.

Apple, Cisco, Others Organize for a Tax Holiday Lobby

Robbins said that “repatriation doesn’t fundamentally change how we think about going forward” with acquisitions. If Cisco sees something it wants, it will pay big bucks for it, tax benefits or not. The fact that Cisco paid nearly $2 billion more than AppDynamics’s private valuation of $1.9 billion shows the lengths—and perhaps desperation—of Cisco as it seeks to absorb booming businesses and talent that can bolster its declining core business.

With no signs of Cisco slowing down any time soon, Wall Street seems content to watch the company’s bets and see if they turn out to be jackpots.

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