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Cisco Systems (CSCO) Beats Q1 Earnings & Revenue Estimates

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Cisco Systems (CSCO - Free Report) delivered first-quarter fiscal 2019 non-GAAP earnings of 75 cents per share coming ahead of the Zacks Consensus Estimate of 72 cents per share. Further, the figure rose 22.9% from the year-ago quarter.

Revenues increased 7.7% year over year to $13.072 billion and surpassed the Zacks Consensus Estimate of $12.871 billion. Acquisitions contributed 80 basis points (bps) to revenue growth in the reported quarter.

Strength witnessed in the company’s Security and Applications segments drove year-over-year growth. Order strength and improving traction of the subscription-based model were other tailwinds.

Top-line Details

Products (75.6% of total revenues) increased 9.2% to $9.89 billion.

Services (24.4%) advanced 3.2% to $3.18 billion. This was driven by growth in software and solutions services.

Revenues from subscriptions represent 57% of the company’s software revenues, up 5 points year over year.

Deferred product revenues were $5.7 billion, surging 24.1% from the year-ago quarter. Deferred service revenues were $11.1 billion, up slightly 0.6% from the year-ago quarter.

Geographically, Americas, EMEA and APJC reported revenue growth of 8%, 6% and 12% on a year-over-year basis, respectively. Total emerging markets grew 16% and the BRICs plus Mexico climbed 19%.

In terms of customer segments, enterprise increased 15%, while service provider was up 2%. Further, commercial and public sector rose 8% and 8%, respectively.

Total product orders increased 8%. Cisco has realigned Product segments into four distinct categories — infrastructure platform, applications, security, and other.

Wireless, Switching Aids Growth

Infrastructure Platforms (58.5% of first-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues grew 9% from the year-ago quarter to $7.64 billion.

The year-over-year increase can primarily be attributed to robust growth across switching, wireless and data center business. Switching revenues increased witnessed robust growth across campus and data center. Adoption of new campus switch, Cat9K and Nexus 9K was impressive.

Further, wireless revenues grew on the back of company’s Wave 2 offerings and Meraki solution. Robust demand for the HyperFlex data-center solution drove data center’s double-digit growth.

Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by many customers. This has enabled customers in becoming more flexible. The company’s latest offering includes Catalyst 9800 wireless controller. Moreover, results benefited from the continuing customer shift from 100G to 400G architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.

AppDynamics Drive Growth

Applications (10.9% of first-quarter revenues) consist of Collaboration portfolio of Unified Communications (“UC”), Conferencing and TelePresence, Internet of Things (“IoT”) and application software businesses such as AppDynamics and Jasper. Revenues increased 18% from the year-ago quarter to $1.42 billion.

Cisco had integrated its Cisco Spark with Webex Platform which enhanced Webex Meeting and enabled it to introduce Webex Teams, strengthening the company’s collaboration portfolio further.

Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.

Cisco had also announced a new partnership with Alphabet Inc. The integration was aimed to automate responses in its centers by leveraging data and intelligence from AI.

Security Remains Strong

Security (4.9% of revenues) climbed 11% to $651 million. Strong growth can be attributed to solid demand witnessed by web security, unified threat, network security and advanced threat solutions.

Cisco’s AI-driven Talos intelligence platform blocks billions of threats per day. The company is striving to leverage machine-learning to deploy security platforms in order to mitigate online risks on a real-time basis.

Other Products

Other Products segment (1.4% of revenues) contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 38% to $178 million.

Acquisition Spree

Cisco recently announced that it has successfully closed the acquisition of privately-held Duo Security. Further, the integration of Duo’s zero trust MFA technology with Cisco’s network and cloud security platforms is likely to enhance security features and mitigate phishing incidents on devices. This buyout will aid Cisco to deliver on its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.

The company also closed its previously announced Burlingame, CA-based July Systems acquisition. The private company provides cloud-based mobile application platform. Per the press release, July Systems team will join the company’s Enterprise Networking Group.

The company has also announced an agreement to sell its Service Provider Video Software Solutions (“SPVSS”) business. This transaction is expected to close in the second quarter of fiscal 2019.

Operating Details

Non-GAAP gross margin expanded 10 bps from the year-ago quarter to 63.8%. Management claims that strong execution and favorable product mix positively impacted the gross margins.

On a non-GAAP basis, product gross margin and service gross margin came in at 63.2% and 65.7%, compared with 63% and 65.6% reported in the year-ago quarter, respectively.

Non-GAAP operating expenses came in at $4.2 billion during the quarter, up 3% year over year.  As a percentage of revenues, operating expenses contracted 140 bps to 31.9%.

Non-GAAP operating margin contracted 150 bps to 31.9%.

Balance Sheet and Cash Flow

Cisco exited the first quarter with cash & cash equivalents and investments balance of almost $42.59 billion down from $46.55 billion in the prior-year quarter. Total debt (short plus long) came in at $25.56 billion as compared with $25.57 billion reported in the previous quarter. The company generated $3.8 billion cash flow from operations down from the previous quarter’s figure of $4.1 billion. Free cash flow came in at $3.6 billion.

In the first quarter, Cisco repurchased approximately 109 million shares of common stock for $5 billion, translating to an average price of $46.01 per share. Furthermore, the company paid a cash dividend of $1.5 billion.

Guidance

For second-quarter fiscal 2019, revenues are expected to grow 5-7% on a year-over-year basis.

Non-GAAP earnings are anticipated between 71 cents and 73 cents per share. The Zacks Consensus Estimate for earnings is pegged at 71 cents.

Non-GAAP gross margin is expected in the range of 63.5-64.5%, while operating margin is anticipated between 30.5% and 31.5% for the quarter.

Conclusion

We believe that company’s expanding footprint in the rapidly growing security market holds promise. Security solutions of Cisco are likely to witness traction, going forward. The company’s extended partnerships with the likes of Aon, Allianz and Rackspace are likely to boost security segment growth.

However, weakness in the switching and routing remains a headwind. Moreover, ongoing transition to subscription-based model will continue to hurt the top line. Arista’s (ANET - Free Report) recent intention of manufacturing switches that connect campus networks is likely to hurt Cisco as it holds a dominant position in that market.

Zacks Rank and Stocks to Consider

Cisco currently carries a Zacks Rank #3 (Hold).

QUALCOMM Incorporated (QCOM - Free Report) and Castlight Health, inc. (CSLT - Free Report) are better-ranked stocks in the broader technology sector. Both carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

QUALCOMM and Castlight Health have a long-term expected EPS growth rate of 11.5% and 22.5%, respectively.

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