Cisco Systems Inc. (NASDAQ:CSCO) delivered second-quarter fiscal 2018 non-GAAP earnings of 63 cents per share beating the Zacks Consensus Estimate of 59 cents. Further, the figure increased 6 cents from the year-ago quarter of 57 cents.
Revenues increased 3% year over year to $11.887 billion and marginally surpassed the Zacks Consensus Estimate of $11.817 billion. Acquisitions contributed 80 basis points (bps) to revenue growth in the quarter. Security, Infrastructure Platforms and Applications revenues increased in the quarter.
Management provided positive top-line guidance for third-quarter fiscal 2018 based on order strength and improving traction of the subscription-based model.
Shares of the company rose more than 2%, yesterday. Cisco shares have returned 25.3% year over year, substantially outperforming the industry’s 20.9% rally.
Top-line Details
Products (73.3% of total revenues) increased 2.5% to $8.71 billion, while services (26.7% of total revenues) increased 2.9% to $3.18 billion. Almost 33% of the revenues were recurring in nature.
Revenues from subscriptions represent 52% of the company’s software revenues, which surged 36% from the year-ago quarter.
Geographically, on a year-over-year basis, revenues from both the Americas and EMEA increased 6%, each. APJC revenues remained flat during the quarter. Total emerging markets grew 1% while the BRICs less Mexico went down 1%.
In terms of customer segments, enterprise increased 3%, while service provider dipped 5%. However, commercial and public sector rose 14% and 8%, respectively.
Total product orders increased 5%. Cisco realigned reporting segments into five distinct categories — infrastructure platform, applications, security, services and other.
Wireless, Switching Witnessed Growth
Infrastructure Platforms (56.3% of second-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues increased 2% from the year-ago quarter to $6.69 billion.
The year-over-year increase was primarily due to robust growth across business. Switching revenues also increased. Moreover, the company witnessed strong demand for the intuitive network solution in the quarter. Further, wireless revenues were strong and demand for the HyperFlex data-center solution along with Wave 2 offerings and Meraki was solid.
However, continued weakness in service provider and a slowdown in enterprise routing business remained a headwind during the quarter.
Management stated that the new subscription-based Catalyst 9000 switching platform has been adopted by more than 1,100 customers within a short span of time since its release. Moreover, results benefited from the continuing customer shift to 10 gig, 40 gig and 100 gig architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.
Cisco’s ACI solution is currently used by more than 4K customers. The company believes that ACI customers are benefiting from increased business agility owing to network automation, simplified management and improved security features of the product.
AppDynamics Drive Growth
Applications (9.9% of revenues) consist of Collaboration portfolio of Unified Communications, Conferencing and TelePresence, Internet of Things (IoT) and application software businesses such as AppDynamics and Jasper.
Segment revenues increased 6% to $1.18 billion. Collaboration revenues rose modestly, with AppDynamics being the major contributor. Deferred revenues jumped 18%.
Security Remains Strong
Security (4.7% of revenues) climbed 6% to $558 million. The results were noticeable as deferred revenues surged 38% from the year-ago quarter.
Strong growth was driven by solid demand for unified threat, advanced threat and web security solutions.
Others
Other Products segment (2.3% of revenues) contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 10% to $273 million.
Services (26.7% of revenues) segment climbed 3% from the year-ago quarter to $3.18 billion. This was driven by growth in software and solutions services.
Acquisitions
During the quarter, the company recently closed it previously announced acquisition of BroadSoft for $1.9 billion. The planned acquisition of Broadsoft will boost the company's recurring revenue base.
Cisco also completed the acquisition of Skyport Systems during the quarter.
Product Launches
During the quarter, the company witnessed enhanced product adoption. The majority of the companies including the likes of Ameritas and Orange selected Cisco to improve IT security, and enhance work processes and automation.
The company also announced various product innovations and partnership programs during the quarter. With emphasis on multicloud, the company announced its HyperFlex platform as well as its Container Platform, which is expected to further expand product portfolio. The company is also reportedly working on a hyperconnected car in collaboration with Hyundai, which will help it in penetrating the smart-vehicle solutions market.
Operating Details
Non-GAAP gross margin expanded 70 bps from the year-ago quarter to 64.7%. The increase primarily stemmed from higher product gross margin (up 90 bps) which was positively impacted by favorable product mix and improved productivity benefits.
Non-GAAP operating expenses during the quarter came in at $3.9 billion, up 2% year over year. Non-GAAP operating expenses, as percentage of revenues, decreased 10 bps to 32.9%.
As a result, Non-GAAP operating margin expanded 70 bps to 31.7%.
Balance Sheet and Cash Flow
Cisco exited the second-quarter with cash & cash equivalents and investments balance of almost $73.7 billion compared with $71.6 billion in the prior-year quarter. Cash & cash equivalents and investments available in the United States at the end of quarter were $2.4 billion. Cash flow from operations was $4.1 billion during the quarter.
Cisco repurchased approximately 103 million shares of common stock for an aggregate price of $4 billion. In the second quarter, the company paid a cash dividend of 29 cents per share.
Guidance
For third-quarter fiscal 2018, revenues are expected to rise 3-5% on a year-over-year basis. Non-GAAP earnings are anticipated between 64 cents and 66 cents per share.
The Zacks Consensus Estimate for earnings is pegged at 62 cents, while that for revenues is at $12.18 billion.
Non-GAAP gross margin is expected in the range of 63-64%, while operating margin is anticipated between 29.5% and 30.5% for the quarter.
Conclusion
We believe that Cisco’s expanding footprint in the rapidly growing security market looks promising. The company’s security solutions continue to add customers. Additionally, the company’s partnerships with Viacom (NASDAQ:VIAB) , Alphabet’s (NASDAQ:GOOGL) division Google and Alibaba (NYSE:BABA) will help Cisco gain significant traction in the cloud and IoT space in the long run.
Cisco’s extended partnerships with the likes of Apple (NASDAQ:AAPL), IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) are also likely to boost growth, particularly in the cloud and IoT. Moreover, Cisco joined forces with Aon and Allianz (DE:ALVG) to provider better cyber risk management solutions for business, which is another positive for the company.
However, weakness in the switching and routing is a headwind. Moreover, ongoing transition to subscription-based model will continue to hurt the top line. Further, weakness in the service provider business segment and intense competition from the likes of Huawei, Juniper and Arista Networks are other major concerns.
Cisco currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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