Networking hardware and software giant Cisco Systems (CSCO – Free Cisco Stock Report) reported solid results for the January quarter. The top line rose 3.3% year over year to $11.9 billion, the first positive showing in two years. Adjusted earnings per share of $0.63 increased an impressive 11%.
Cisco performed well from a profitability standpoint, with product gross margin up 90 basis points, owing to effective pricing and productivity enhancements. Still, the company is still feeling the negative effects of higher memory costs, which is expected to continue.
The core infrastructure business increased revenue by 2%, thanks to prior efforts to develop innovative new technologies. Data center switches stood out, thanks largely to the subscription-based Catalyst 9000, which attaches recurring software revenue when customers buy the hardware. The platform managed to double the customer base sequentially, making it the fastest ramping product in company history. Server products and HyperFlex offerings also contributed to the improvement. Still, routing products declined, as demand from service providers remained weak.
The Security unit increased revenue 6%, as organizations continue to shore up their ability to defend against cyberattacks. We expect this trend to persist for the foreseeable future.
The Applications division also grew 6% thanks to strength from Telepresence, conferencing and AppDynamics, which was purchased last year.
Cisco continues to make progress with its long-term goal of increasing recurring revenue and transitioning to a software centric company. Indeed, 33% of total revenue was recurring during the quarter, up 2 percentage points from a year ago. Revenue from subscriptions was 52% of total software sales. Part of that was driven by the recent acquisition of BroadSoft, a provider of cloud-based unified communications applications to service providers.
Taking a look at customer segments, enterprise sales grew 3%, commercial advanced an impressive 14%, and public sector grew 8%. As expected, the service provider group was weak, falling 5%, which we expect to continue throughout 2018 and possibly longer.
Management voiced its approval of the passing of tax reform. Cisco has been a long-time critic of taxes on bringing overseas cash back to the U.S., which the new legislation reduces. In the current quarter, the company plans to repatriate $67 billion of the $73.7 billion it has stockpiled overseas. The bulk of that will be returned to shareholders. Indeed, CSCO raised its dividend 14% and added $25 billion to the $6 billion left on its prior share-repurchase authorization. All $31 billion is expected to be spent on repurchases over the next 18-24 months. The company will continue to look for attractive acquisition targets as well.
Cisco expects to continue to grow the top line in the current quarter, providing a revenue growth target of 3%-5%. Earnings per share are expected to be $0.64-$0.66, versus $0.60 in the prior-year's April quarter.
Cisco has done an admirable job executing its turnaround strategy, foreseeing technology transitions, and setting the company up for sustainable future growth. We think these share are suitable for conservative, income-oriented investors.
Investors liked what they heard here, bidding shares of Cisco up in early morning trading.
About The Company: Cisco Systems Incorporated is a leading provider of Internet Protocol-based networking and other products for transporting data, voice, and video across geographically dispersed local-area networks, metropolitan-area networks, and wide-area networks. Devices are primarily integrated by Cisco IOS Software and include Routers, Switches, New Products, and Other. Provides services associated with these products.
— Kevin Downing
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
