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Networking equipment and software provider Cisco Systems (CSCOFree Cisco Systems Stock Report) reported in-line results for the fiscal fourth quarter (year ended July 31st). However, guidance was below expectations and the shares are down moderately in response.

Total revenue of $13.4 billion matched our estimate and grew 6% year over year, with around 10% of the advance coming from acquisitions. Total product sales increased 7%, and service revenue rose 4%. The pricing environment remains in good shape, and the operating margin increased 140 basis points. Earnings per share of $0.83 beat our call by $0.02 and increased 19%.

The core Infrastructure Platforms division's sales were up 6%. Switching increased at a double-digit pace thanks to solid demand for data center gear and the flagship Nexus 9000 product line. Too, the Catalyst 9000 line of wireless switches added more customers than in any other prior period. Router sales decreased markedly, owing to continued softness from service provider customers. Applications revenue was up 11%, with collaboration, AppDynamics, and Internet of Things software growing double digits. The Security division recorded a 14% advance. Software subscriptions were 70% of total software revenue, up 12 percentage points versus the prior-year quarter.

Taking a look at specific customer groups, enterprise sales were down 2%. Weakness in China, the United Kingdom, and the United States all contributed to the decline. The company put some of the blame on a difficult comparison. Further, China still accounts for less than 3% of total revenue, which demonstrates just how dramatic the drop there was overall. The company said the trade war had a significant impact. Meanwhile, small- and mid-sized business had 7% growth, and the public sector spent 13% more than a year ago. The worst result by far came from the service provider group, as sales there plummeted 21%.

Order growth was flat overall. Orders from the Americas were around the same as the prior quarter. Most U.S. telecom companies are still focused on consumer 5G trials, and Cisco doesn't expect a boost from 5G over the near term. In Asia, Cisco saw continued weakness from Chinese service providers and enterprises. In fact, the company isn't even allowed to bid on projects anymore. Further, two large buildouts in India last year also created a difficult comparison. Excluding the service provider group, orders grew mid-single digits. For the first quarter, Cisco is guiding for revenue growth in the range of 1% to 2%. Earnings per share are expected to come in between $0.80 and $0.82 reflecting year-over-year growth of 7%-9%. In response, we are cutting our fiscal 2020 earnings forecast by a dime, to $3.30 per share.

Although the near-term outlook for Cisco is less than ideal, the company remains well positioned to take advantage of many long-term growth drivers in the technology space. We think the stock still offers solid risk-adjusted investment prospects overall.

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.