What's the idea?
In March 2024, Cisco completed its largest acquisition to date, buying Splunk for $28 billion. The acquisition was funded by issuing additional debt and is expected to create significant synergies by combining Splunk's artificial intelligence capabilities with Cisco's data. Management plans to focus on growth areas such as software, services, AI and cybersecurity, while balancing financial obligations and reducing the hardware portion of its product mix.
Cisco reported mixed financial results for Q4 FY2024. Revenue for the quarter declined 10% year-over-year (YoY) to $13.64 billion from $15.20 billion a year earlier, but exceeded analysts' expectations of $13.54 billion. Adjusted earnings per share (EPS) were $0.87, down from $1.14 a year earlier, but slightly above analysts' forecast of $0.85.
In addition, some of Cisco's product segments and operating performance were largely driven by the Splunk acquisition, while the company's traditional business showed signs of stagnation. For example, annual recurring revenue (ARR) reached $29.6 billion, up 22%, but excluding Splunk it was $25.3 billion, up only 4%. Total subscription revenue for the quarter rose 17% to $7.7 billion, but without Splunk it was up only 2%.
The Splunk acquisition had a significant impact on Cisco's financial position. The company issued $21.62 billion in new debt, which increased total debt by 269% YoY to $31.0 billion.This change turned Cisco's net cash position in fiscal 2023 into a net debt position of $13.1 billion. While Cisco's debt level remains manageable, high interest rates have significantly increased interest expense, which has impacted margins and earnings per share.
We recommend buying PUT options on CSCO stock with a strike price of $50 and an expiration date of 17/01/2025. The option will cost about $2.1, while buying one contract will cost $210, as options are traded for 100 shares.
Clients who are more optimistic about the possible CSCO stock price dynamics and are ready to take a bullish position can purchase CALL options with a strike price of $50 and an expiration date of 17/01/2025. The option will cost about $2.9, while buying one contract will cost $290.
About Company
Cisco Systems Inc (CSCO) develops, manufactures and sells products and services based on Internet Protocol networking technologies for the communications and information technology industry. The company develops collaboration products, including unified communications, telepresence and conferencing, and analytics software. Cisco also offers security products, consulting services, and solutions for cloud computing and contact centers. Cisco Systems was founded in 1984 and is headquartered in San Jose, USA.
Why do we like PUT OPTION CSCO.US @50?
Cisco Systems Inc. (CSCO) is a leading global technology company. It develops and markets a wide range of products that power networks and the Internet. The company offers collaboration products that include unified communications, telepresence and conferencing, and analytics software. Cisco also provide security products, consulting services, and solutions for cloud computing and contact centers. These products are designed to help customers manage the growing number of users, devices, and objects connecting to their networks. Cisco's customer base is diverse and includes companies of all sizes, as well as government agencies, governments, and service providers, including large web-scale providers.
The company's products and technologies are organized into six key categories:
- Secure, Agile Networks — 51% of total revenue 2023.
- Internet for the Future — 9% of total revenue.
- Collaboration — 7% of total revenue.
- End-to-End Security — 7% of total revenue.
- Optimized Application Experiences — 1% of total revenue.
In addition to product offerings, Cisco provides a wide range of services, including technical support and advanced services. Services are a significant part of Cisco's business, accounting for 24% of the company's total revenue in 2023.
Cisco's revenue structure
In March 2024, Cisco completed its largest acquisition to date, buying Splunk for $28 billion in an all-cash deal. This acquisition was financed through the issuance of additional debt. Cisco management expects significant synergies from combining Splunk's artificial intelligence capabilities with Cisco's extensive data and plans to reduce global headcount by 7% to focus on growth areas such as AI and cybersecurity. The transaction is expected to have a positive impact on cash flow and gross profit margin in the first fiscal year after completion and on adjusted non-GAAP EPS in the second year.
In the short term, the acquisition has already proven its worth, helping to stabilize Cisco's financial results in the fourth quarter of fiscal 2024. Although revenue for the quarter fell 10% YoY to $13.64 billion (down from $15.20 billion a year earlier), it exceeded analysts' expectations of $13.54 billion, according to a Capital IQ survey. Splunk contributed about $960 million in revenue for the quarter, in line with management's expectations.
Cisco also reported Q4 FY2024 adjusted non-GAAP EPS of $0.87 per diluted share, down from $1.14 a year earlier but slightly above analysts' forecast of $0.85. The impact of interest on borrowings raised to finance the Splunk acquisition more than offset the positive impact from Splunk's operating performance, resulting in a net negative $0.04 per adjusted EPS for the quarter.
A more detailed analysis of Cisco's revenue for Q4 FY2024 shows that total product revenue was $9.9 billion, down 15% YoY. Management attributes this decline to inventory issues with customers in the last quarter. On the other hand, service revenue grew 6% to $3.8 billion.
Product revenues by segment were as follows:
- The Networking segment posted a 28% decline from Q4 FY2023, which saw near-record excess reserve shipments.
- Security segment revenue increased 81%, driven by the integration of Splunk. Excluding Splunk, segment revenue increased 6% due to competitive wins and strong performance in SASE and network security.
- Collaboration segment revenue was flat, with growth in Cloud Calling and CPaaS offset by declines in Meetings and Devices.
- Observability segment revenue increased 41% driven by growth in offerings from Splunk and ThousandEyes Network Services. Excluding Splunk, segment revenue increased 12% for the quarter.
Cisco's Q4 FY2024 revenue by segment
Cisco's strong operational and recurring performance for the quarter was also largely driven by the Splunk acquisition. ARR (annual recurring revenue) reached $29.6 billion, up 22% YoY, and ARR from products grew 43%. However, excluding Splunk, ARR was $25.3 billion, up 4%, and ARR from products grew only 9%.
In addition, total subscription revenue for the quarter increased 17% to $7.7 billion, which now represents 56% of Cisco's total revenue. Excluding Splunk, total subscription revenue grew only 2% to 53% of the company's total revenue.
Cisco saw stable product demand, ending the fiscal year with a 14% increase in orders, or 6% growth excluding Splunk. Management said this growth indicates that the period of customer inventory absorption is largely over, pointing to a healthier demand situation going forward.
Cisco's key operational metrics in Q4 FY2024
Thus, Cisco's recent financial results show a mixed picture: certain product segments and operating performance were largely driven by the Splunk acquisition, while the company's traditional business appears to be stagnating. In addition, the acquisition, which was financed through the issuance of additional debt, has had a significant impact on Cisco's financial position.
In Q3 FY2024, Cisco issued $21.62 billion in new debt and repaid $1.44 billion. As a result, the company's total debt increased 269% YoY to $31.0 billion in FY2024, the highest level in five years. This resulted in net debt of $13.1 billion compared to net cash of $17.8 billion in FY2023.
Dynamics of debt and cash flow from Cisco's operating activities
Although the net debt to EBITDA ratio remains relatively comfortable at 0.85x, and 71% of the company's long-term debt is due for repayment in 2029 and beyond, Cisco faces pressure from high interest rates. As of April 27, 2024, the company had $11.89 billion of short-term debt with an effective rate of 5.42% and $20.25 billion of long-term debt with a weighted average effective rate of 4.98%. As a result, interest expense rose sharply, increasing 3.76 times from $111 million in the fourth quarter of fiscal 2023 to $418 million in the fourth quarter of fiscal 2024.
Thus, while the Splunk acquisition helped Cisco's operating performance, it had a negative impact on the company's debt load, margins and EPS. The main question now is whether Cisco's strategic bet on the future development of artificial intelligence and the growing demand for these technologies will pay off in the long term.
CSCO historical multipliers
How to use the idea
We recommend buying PUT options on CSCO stock with a strike price of $50 and an expiration date of 17/01/2025. The option will cost about $2.1, while buying one contract will cost $210 as options are traded for 100 shares.
The investor will profit if on the expiration day the price of the underlying asset is below the breakeven point* of $47.9. The lower the CSCO stock price falls below this point, the greater the profit will be. We recommend closing the position when the option value reaches $4.5. In this case the profit will be 114%.
If on the expiration day the price of the underlying asset is below $50 but above $47.9, the investor will receive a limited loss. If the price of the underlying asset is above $50, the investor will receive a maximum loss of $210.
The chart below shows the distribution of gains and losses from the option position depending on the CSCO stock price on the expiration date.
Bullish view on stocks and CALL options
It cannot be ruled out that some positive corporate developments could cause the stock to rise. If you are bullish on the company, you can buy CALL options with a strike price of $50 and an expiration date of 17/01/2025. The option will cost about $2.9, while buying one contract will cost $290.
If the price of the underlying asset is above the breakeven point of $52.9 on the expiration day, the potential profit is unlimited.
If on the expiration day the price of the underlying asset is above $50 but below $52.9, the investor will receive a limited loss. If the price of the underlying asset is below $50, the investor will receive a maximum loss of $290.
Important note
Options must be purchased with a limit order. Buying an option contract with a market order can result in extremely unfavorable prices.
This is a speculative investment idea which carries increased risks. Investing in options can provide a 50%, 100%, 200%, and in some cases even higher returns, but also can lead to a complete loss of the amount invested! In cases where volatility is low, profit or loss can vary between 20% and 30%.
A prudent approach to implementing option ideas is to invest a small portion of the portfolio in many such cases. In this way, losses from unsuccessful ideas will be compensated by high returns on successful investments.
Key Risks
- There is a possibility that some positive corporate events could cause the CSCO stock price to rise. In this case, PUT options would decrease in value, while the CALL options would appreciate.
- The relatively low volatility in CSCO stock may cause the options to depreciate by the expiration date.
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