Networking equipment and software vendor Cisco Systems (CSCO – Free Cisco Stock Report) has reported in-line results for the October-quarter. Revenue of $12.1 billion fell 2% year over year, matching our estimate. Overall, product sales decreased 3%, while service revenue rose 1%. Earnings per share of $0.61 were flat compared to last year and beat our call by a penny. The shares were up nicely after the company forecast revenue to grow in the fiscal second quarter (years end last Saturday in July), which would mark the first advance in two years.
Cisco made progress in its efforts to transition to a more software-centric company. Around 32% of the top line came from recurring revenue streams, an increase of 3% versus the prior year's fiscal first quarter. Deferred product revenue from recurring software and subscription offerings grew 37%, and 12% of product revenue is now recurring, versus 6% a year ago. Further, the company announced the purchase of BroadSoft for $1.8 billion. The provider of cloud-based unified communications software to service providers should help with the company's recurring revenue initiative.
The gross margin fell 150 basis points year over year, with 130 basis points of that resulting from higher prices from memory used in equipment. Cisco expects this to remain a headwind over the near term.
Meanwhile, the company introduced new reporting segments in the quarter to reflect changes in how modern networks are built and operated.
Infrastructure Platforms saw sales drop 4%, with most of that weakness coming from routing devices. Service provider customers continued to spend less on physical equipment, as did enterprises. Switching revenue fell modestly overall, but next-generation data center switching platforms were solid, owing to the continued shift to 10-gig and 40-gig architectures.
The next newly organized division, Applications, consists of unified communications, conferencing, telepresence, Internet of Things, and application software products. Together, these offerings grew 6%, with the majority of that being driven by the recently acquired AppDynamics, which helps customers manage applications across cloud computing environments. Deferred revenue for the Applications unit increased 18%.
The Security segment grew its top line 8%, and deferred revenue rose an impressive 42%. With the recent slew of cybersecurity attacks, corporations are prioritizing security in their networks. Cisco aims to generate double-digit revenue growth on a consistent basis for this business, and we think that goal is achievable given the favorable demand environment.
From an orders perspective, all three major geographic regions experienced growth. The Americas increased 1%; Europe, the Middle East, and Africa advanced 2%; Asia Pacific, Japan, and China increased 1%. However emerging market sales fell 6%. Cumulatively, orders rose 1%.
Taking a look at customer groups, enterprise fell 5%, commercial rose 12%, public sector increased 3%, and service provider dropped 6%.
The company touched on the topic of tax reform, saying it supports both the tax plans in the House and Senate, as they allow for overseas cash repatriation. If that element is ultimately successful, the company should bring home some of the $71.6 billion it has stockpiled overseas. Management said it would then get more aggressive with share repurchases, increase the dividend, and still remain focused on acquisitions.
The company's fiscal second quarter guidance is encouraging. Revenue is expected to grow 1%-3%. Strong order growth and the subscription model gaining traction prompted the favorable outlook. Management is unclear on whether the growth will be sustainable, though. Meanwhile, earnings per share are expected to come in at $0.58-$0.60, in line with our $0.59 call.
Overall, this was a positive showing for Cisco. The company is doing a good job transitioning its business to compete in a changing demand environment. Although the shares lack compelling long-term price appreciation at recent levels, conservative, income-oriented investors may want to take a closer look here.
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.