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Networking equipment and software maker Cisco Systems (CSCOFree Cisco Systems Stock Report) has reported in-line results for the April quarter. Total revenue of $12.5 billion was slightly higher than our $12.4 billion estimate, and grew 4% year over year. Product sales rose 5%, while service revenue only advanced 3%. The latter was somewhat worse than investors had been looking for, and the shares declined marginally as a result. From a profitability perspective, total gross margin fell 50 basis points, product gross margin declined 30 basis points, and the service gross margin slipped 90 basis points. Management said the first two metrics were hurt by higher memory pricing, which has been a headwind for several quarters and should remain for several more. Record earnings per share of $0.66 eclipsed our estimate by one cent.

The company continued to make progress in its effort to increase subscription/recurring revenue. In the quarter, 32% of total revenue came from recurring offers, an increase of two percentage points from a year earlier. Too, revenue from subscriptions was 55% of software sales. Meanwhile orders showed good momentum, growing 4%.

The core Infrastructure Platforms division increased sales 2%. Switching had solid growth in both data center and campus devices. The latter category was driven by the relatively new Catalyst 9000 switch, which has become the fastest-ramping new product introduction in Cisco's history. The flagship switch now has 5,800 customers, up from 3,100 in the prior quarter. Importantly, there hasn't been a drop off in the attachment rate of corresponding software for the Catalyst 9000, which is helping the effort to grow recurring revenue. Sales of data center equipment had strong double-digit growth, driven by servers and HyperFlex offerings. The routing business declined, however, largely due to weakness from service providers. This headwind is not expected to abate in the near term.

Meanwhile, solid growth in TelePresence, AppDynamics, and unified communication infrastructure helped drive Applications revenue up 19%.

The Security unit, which is becoming an increasingly important part of Cisco's business, saw sales rise a solid 11%, thanks to unified threat, advanced threat, and web security products. Notably, Cisco is using artificial intelligence and machine earnings to reduce time to detection and remediation.

Taking a look at customer groups, revenue from enterprises rose 11%, commercial 7%, public sector 2%, and service provider was down 4%.

Management is calling for fiscal fourth-quarter revenue to rise between 4% and 6%. Earnings per share should land between $0.68 and $0.70.

Overall, this was another solid quarter from Cisco. Although service revenue could have been a little higher, we are not overly concerned about the well being of that business. The company remains well-positioned to capitalize on several attractive networking trends and we recommend the shares to conservative investors looking for technology exposure. Wall Street was not impressed with the most recent financial results, however, sending CSCO stock trading lower this morning.

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.