A month has gone by since the last earnings report for Cisco Systems (CSCO - Free Report) . Shares have added about 4.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Cisco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Cisco Systems delivered fourth-quarter fiscal 2018 non-GAAP earnings of 70 cents per share coming ahead of the Zacks Consensus Estimate by a penny. Further, the figure rose 14.7% from the year-ago quarter.
Revenues increased 6% year over year to $12.844 billion and surpassed the Zacks Consensus Estimate of $12.763 billion. Acquisitions contributed 90 basis points (bps) to revenue growth in the reported 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 (54% of total revenues) increased 7% to $9.64 billion.
Services (46%) advanced 3% to $3.20 billion. This was driven by growth in software and solutions services.
Almost 32% of the revenues were recurring in nature gaining 1 point from the year-ago quarter.
Revenues from subscriptions represent 56% of the company’s software revenues, up 5 points year over year.
Deferred product revenues were $6.1 billion, surging 23% from the year-ago quarter.
Geographically, Americas, EMEA and APJC reported revenue growth of 6%, 6% and 12% on a year-over-year basis, respectively. Total emerging markets grew 12% and the BRICs plus Mexico climbed 22%.
In terms of customer segments, enterprise increased 11%, while service provider was up 6%. Further, commercial and public sector rose 9% and 1%, respectively.
Total product orders increased 7%. Cisco has realigned Product segments into four distinct categories — infrastructure platform, applications, security, and other.
Wireless, Switching Witnessed Growth
Infrastructure Platforms (57.9% of fourth-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues grew 7% from the year-ago quarter to $7.44 billion.
The year-over-year increase was primarily owing 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 reported quarter.
Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by more than 9,650 customers, up 3,850 sequentially. Moreover, results benefited from the continuing customer shift to 100 gig architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.
AppDynamics Drive Growth
Applications (10.4% of fourth-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 10% from the year-ago quarter to $1.34 billion.
Cisco had 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.
Cisco also recently 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 12% to $627 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 segment (1.8% of revenues) contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 18% to $232 million.
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 reinforce Cisco’s collaboration portfolio.
The company also announced it plans to acquire Burlingame, CA-based July Systems. The private company provides cloud-based mobile application platform. The tech giant aims to conclude the buyout in first quarter of fiscal 2019. Per the press release, July Systems team will join the company’s Enterprise Networking Group.
The company also displayed interest in buying Duo Security. This private company leads the market in trusted access and MFA technologies. It aids enterprises to defend against breaches through its effective cloud-based Trusted Access product suite. The acquisition is expected to close in the first quarter of fiscal 2019.
Non-GAAP gross margin contracted 80 bps from the year-ago quarter to 62.9%. Management claims that the decrease can be attributed to higher memory pricing. Moreover, unfavorable product mix, negative impacted the gross margins. This is anticipated to persist in the near term.
Non-GAAP operating expenses, as percentage of revenues, contracted 40 bps to 32.2%.
Non-GAAP operating margin contracted 50 bps to 31.1%.
Balance Sheet and Cash Flow
Cisco exited the fourth quarter with cash & cash equivalents and investments balance of almost $46.55 billion down from $54.43 billion in the prior-year quarter. Total debt (short plus long) came in at $25.57 billion. The company generated $4.1 billion cash flow from operations up from the previous quarter’s figure of $2.42 billion. Free cash flow came in at $3.9 billion.
In the fourth quarter, Cisco repurchased approximately 138 million shares of common stock for $6 billion, translating to an average price of $43.58 per share. Furthermore, the company paid a cash dividend of $1.5 billion.
For first-quarter fiscal 2019, revenues are expected to grow 5-7% on a year-over-year basis.
Non-GAAP earnings are anticipated between 70 cents and 72 cents per share.
Non-GAAP gross margin is expected in the range of 63-64%, while operating margin is anticipated between 30% and 31% for the quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Cisco has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Cisco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.