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Cisco's Shift To A Subscription Model Will Be A Positive In The Long-Term

Cisco's Shift To A Subscription Model Will Be A Positive In The Long-Term

Cisco Systems, Inc. (NASDAQ: CSCO)'s earnings report Wednesday resulted in the stock moving lower by 4 percent Thursday, but some analysts aren't parting ways with their bullish outlook, including Oppenheimer's Ittai Kidron.

Cisco's earnings report demonstrated that the company is "executing well" on a transforming its business to a software and subscription-based model, Kidron noted in a research report. In fact, some of the early metrics on the transformation are "encouraging." For example, recurring revenue represented 11 percent of the product revenue in the quarter, up from 8 percent in the same quarter a year ago (see Kidron's track record here).

"While likely to accelerate, it'll still be several years until it's a quarter of product revenue," Kidron added. "The pace of transition illustrates Cisco's challenge in returning to YoY revenue growth near term absent a macro recovery/M&A."

However, a transformation for a business of Cisco's size and reach will weigh on its revenue growth for the coming quarters -- if not years, Kidron added. As such, it would be difficult for the company to deliver any near-term upside to its numbers but this doesn't take away from the long-term economic upside story.

Ultimately, Cisco will be in a stronger position down the road than it is today. In the meantime, the stock's "attractive" dividend yield of around 3.7 percent should keep investors "engaged."

Kidron maintains an Outperform rating on Cisco's stock with an unchanged $36 price target.

Baird: OK Results, All Things Considered

Baird's Jayson Noland maintains an Outperform rating on Cisco's stock with an unchanged $38 price target, as the company's earnings report were OK when factoring in the shift toward a subscription revenue model.

Similar to Kidron, Noland believes Cisco's transformation represents a near-term challenge but serves as a "strong long-term positive" for the company (see Noland's track record here).

"Cisco is strategically moving to a model that relies more on recurring revenue but is costing the company 2-3% of top-line growth given revenue recognition accounting," Noland explained. "The drivers of incremental recurring revenue are areas such as Cisco ONE bundles, Security software and Collaboration software. We believe this is the correct strategic direction."

At last check, shares of Cisco were down 3.97 percent at $31.06.

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Image Credit: By Figure8 - Own work, CC BY-SA 3.0, via Wikimedia Commons

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