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How Cisco Systems, Inc. Gained 11% in February

By Anders Bylund - Mar 10, 2017 at 1:04PM

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A new and improved version of the networking giant's business model is already paying strong dividends (literally).

What happened

Shares of Cisco Systems ( CSCO 0.14% ) rose 11.3% in February 2017, according to data from S&P Global Market Intelligence.

So what

The big surge fell near the middle of the month, when Cisco reported solid second-quarter results with a side of optimistic forward guidance targets. If that weren't enough, the networking equipment veteran also boosted its quarterly dividend payout by 12% and retired $1 billion of its shares. Cisco investors can now look back at a market-beating 25% return over the last 52 weeks.

Ethernet cables plugged into a busy network router.

Image source: Getty Images.

Now what

Cisco is reshaping its revenue intakes these days, raising the percentage of recurring contract sales from 26% to 31% over the last six quarters. Because of this transition, Cisco's deferred revenue balance increased by 51% year over year in the second quarter. The end result is a more stable and predictable business model. Expect this trend to continue, as "everything is growing in that space," according to CFO Kelly Kramer.

Management is constructing a whole new business framework, here, and I quite like the new structure. To stay on top of Cisco's fundamental makeover, keep an eye on deferred revenue and gross margins from here on out. So far, the move toward more contract-based sales is working out brilliantly:

CSCO Non-Current Deferred Revenue (Quarterly) Chart

CSCO Non-Current Deferred Revenue (Quarterly) data by YCharts.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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