Cisco Systems (CSCO - Free Report) delivered third-quarter fiscal 2018 non-GAAP earnings of 66 cents per share coming ahead of the Zacks Consensus Estimate by a penny. Further, the figure rose 10% from the year-ago quarter.
Revenues increased 4.4% year over year to $12.463 billion and marginally surpassed the Zacks Consensus Estimate of $12.421 billion. Acquisitions contributed 120 basis points (bps) to revenue growth in the quarter.
Strength witnessed in company’s Security and Applications segments drove year-over-year growth. Order strength and improving traction of the subscription-based model were other tailwinds.
Products (74.7% of total revenues) increased 4.7% to $9.30 billion.
Services (25.3%) advanced 3.4% to $3.16 billion. This was driven by growth in software and solutions services.
Almost 32% of the revenues were recurring in nature gaining 2% from the year-ago quarter.
Revenues from subscriptions represent 55% of the company’s software revenues.
Recurring software and subscriptions generated $5.6 billion deferred product revenues, which surged 29% from the year-ago quarter.
Geographically, Americas, EMEA and APJC reported revenue growth of 2%, 9% and 7% on a year-over-year basis, respectively. Total emerging markets grew 7% and the BRICs plus Mexico climbed 12%.
In terms of customer segments, enterprise increased 11%, while service provider dropped 4%. However, commercial and public sector rose 7% and 2%, respectively.
Total product orders increased 4%. Cisco has realigned Product segments into four distinct categories — infrastructure platform, applications, security, and other.
Wireless, Switching Witnessed Growth
Infrastructure Platforms (57.5% of third-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues inched up 2% from the year-ago quarter to $7.16 billion.
The year-over-year increase was primarily due to robust growth across switching, wireless and data center business. Switching revenues increased witnessed strong growth across campus and data center. Adoption of new campus switch, Cat9K 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.
However, continued weakness in service provider which led a slowdown in enterprise routing business remained a headwind during the quarter.
Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by more than 5,800 customers, up 2,700 sequentially. Moreover, results benefited from the continuing customer shift to 100 gig architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.
Cisco’s ACI solution continues to witness traction. The company believes that ACI customers are gaining from increased business agility owing to network automation, simplified management and improved security features of the product. Management remains optimistic on the newly introduced ACI SDN offering.
AppDynamics Drive Growth
Applications (10.5% of third-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 19% from the year-ago quarter to $1.31 billion.
In the quarter, Cisco integrated its Cisco Spark with Webex Platform which enhanced Webex Meeting and enabled it to introduce Webex Teams, further strengthening the company’s collaboration portfolio.
Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.
Security Remains Strong
Security (4.7% of revenues) climbed 11% to $583 million. The results were noticeable as deferred revenues surged 38% from the year-ago quarter.
Strong growth can be attributed to solid demand witnessed by web security, unified threat and advanced threat solutions.
Cisco’s AI-driven Talos intelligence platform blocks 20 billion threats per day. The company is striving to leverage machine-learning to deploy security platforms to mitigate online risks on a real-time basis.
Other Products segment (2% of revenues) contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 6% to $249 million.
A positive development pertaining to the sector is the recent divestiture of a portion of company’s previously acquired NDS video assets. This move is likely to mitigate the sluggishness persistent in this segment.
Non-GAAP gross margin contracted 40 bps from the year-ago quarter to 63.9%. Management claims that the decrease can be attribute to higher memory pricing. This is anticipated to persist in the near term.
Non-GAAP operating expenses during the quarter came in at $4.05 billion, up 5.7% year over year. Non-GAAP operating expenses, as percentage of revenues, expanded 40 bps to 32.5%.
As a result, non-GAAP operating margin contracted 80 bps to 31.5%.
Balance Sheet and Cash Flow
Cisco exited the third quarter with cash & cash equivalents and investments balance of almost $54.43 billion down from $67.97 billion in the prior-year quarter. Cash & cash equivalents and investments available in the United States at the end of quarter were $47.5 billion. The company generated $2.42 billion cash flow from operations down from the year-ago figure of $3.3 billion.
In the third quarter, Cisco repurchased approximately 140 million shares of common stock for $6.02 billion, translating to an average price of $42.83 per share. Furthermore, the company paid a cash dividend of 33 cents per share.
For fourth-quarter fiscal 2018, revenues are expected to grow 4-6% on a year-over-year basis. The Zacks Consensus Estimate for revenues is pegged at $12.71 billion, representing year-over-year growth of 4.8%.
Non-GAAP earnings are anticipated between 68 cents and 70 cents per share. The Zacks Consensus Estimate for earnings is at 68 cents, translating to year-over-year growth of 11.5%.
Non-GAAP gross margin is expected in the range of 63-64%, while operating margin is anticipated between 29.5% and 30.5% for the quarter.
With Webex Meetings, Webex Devices and Webex Teams yielding results, we believe Cisco is well poised to capitalize on the emerging AI-based enterprise applications.
The company recently closed the acquisition of Accompany for $270 million. The newly acquired company is set to join Collaboration Technology Group (“CTG”) of Cisco. Accompany’s robust enterprise AI capabilities will strengthen Cisco’s collaboration portfolio.
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 is 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 Other Stocks to Consider
Cisco currently carries a Zacks Rank #2 (Buy).
Other top-ranked stocks in the broader technology sector are Cadence Design Systems (CDNS - Free Report) and Citrix Systems (CTXS - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for Cadence and Citrix are projected to be 12% and 9.05%, respectively.
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