Networking equipment and software vendor, Cisco Systems, (CSCOFree Cisco Systems Stock Report) reported July-quarter results that were largely in line with our expectations. Revenue of $12.1 billion was slightly above our $12.0 billion estimate and down 4% year over year. Total product sales decreased 5%. Services revenue was better, rising 1%, as software services offset declining hardware maintenance demand. The product gross margin was down two percentage points, owing to higher cost of memory used in Cisco's supply chain, lower revenue, and some small price declines. The margin pressure is expected to continue for the next few quarters. Meanwhile, overall product orders came in flat. Earnings per share of $0.61 fell a penny shy of our estimate and 3% on a year over year basis.

Cisco's largest business, Switching, fell a sharp 9%, owing to weakness from enterprise customers. This was somewhat offset by the ACI data center switching platform, which had record growth of 38%. ACI products compete with software-defined network ``white-box'' switches, but have yet to be materially challenged by the arguably cheaper generic devices. The company recently rolled out new Catalyst 9000 switches and they have been gaining good initial traction. Nonetheless, we are not expecting a significant rebound in switching demand in the near term.

Elsewhere, routing was also down 9%, due to weak service provider and enterprise spending. Collaboration sales fell 3% as a slowdown in Unified Communication products offset growth in video conferencing. The data center business fell 4%, owing to an industrywide shift from powerful and costly blade servers to cheaper rack servers. There was solid traction for Cisco's hyperconverged offering HyperFlex, though. The Wireless unit grew sales 5% thanks to the cloud-controlled Wi-Fi product Meraki. The Security division grew a disappointing 3%, as legacy firewall products somewhat offset newer Unified Threat, Web Security, and Advanced Threat offerings. Cisco forecasted low- to mid-teens growth for the unit at its recent analyst day and claimed the shortfall was simply a revenue timing issue. Deferred revenue growth rose 49% and order growth was the strongest it has been in the past two years. We have confidence in this business and think the very public cyberattacks of recent months should spur demand.

Revenue from different customer segments was as follows: enterprise down 1%; commercial up 4%; public sector up 2%; service provider down 7%. Cisco thinks 5G wireless buildouts will eventually help service provider demand, but we are not optimistic about this customer group over the near-term.

One positive takeaway from the earnings release was deferred product revenue related to software and subscriptions growing 50% to $5 billion, or double the amount from two years ago. Overall, 31% of total revenue was recurring and subscriptions represented 51% of software revenue.

The company's guidance for the first quarter calls for revenue to fall 1% to 3%, and earnings per share of $0.59 to $0.61, in line with our $0.60 estimate.

Cisco appears to be doing well considering the challenging demand environment. Still, there was little to get excited about from the earnings release, and the stock was down on the news. Conservative, income-oriented accounts may find the shares suitable, but more aggressive investors should probably look elsewhere.

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.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.