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Weak Guidance Tarnishes Cisco's Solid Quarter

By Timothy Green – Updated May 18, 2017 at 4:17PM

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The company boosted the bottom line via cost cuts, but it expects a major revenue decline in the fourth quarter.

Networking hardware company Cisco Systems (CSCO 0.42%) reported its fiscal third-quarter results after the market closed on May 17. Revenue dipped slightly, with the routing and collaboration businesses suffering declines, but cost-cutting efforts led to a jump in net income. The real story was Cisco's guidance, which called for a steep decline in revenue during the fourth quarter. Here's what investors need to know about Cisco's third-quarter report.

Cisco Systems results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$11.9 billion

$12.0 billion

(0.5%)

Net income

$2.52 billion

$2.35 billion

7.1%

Non-GAAP EPS

$0.60

$0.57

5.3%

Data source: Cisco Systems.

The Cisco logo.

Image source: Cisco Systems.

What happened with Cisco Systems this quarter?

The core switching business enjoyed a small revenue boost, while collaboration, routing, and data center suffered declines.

  • Switching revenue rose 2% year over year to $3.49 billion, while routing revenue slumped 2% to $2.03 billion.
  • Collaboration revenue was $1.02 billion, down 4% year over year.
  • Data center revenue declined 5% to $767 million, while wireless revenue grew 13% to $703 million.
  • Security revenue grew by 9% to $527 million, a slower pace than the 12% growth rate recorded for the first nine months of fiscal 2017.
  • Recurring revenue was 31% of total revenue, up from 29% at the same time last year.
  • Deferred revenue rose 13% year over year to $17.3 billion. Deferred product revenue was up 26%, while deferred service revenue was up 7%. The portion of deferred revenue related to recurring software and subscription businesses was up 57%, or up 51% excluding the acquisition of AppDynamics.
  • Cisco's total cash balance was $68 billion at the end of the third quarter, with $2.9 billion available in the United States.

Cisco provided the following guidance for the fourth quarter:

  • Revenue is expected to decline by 4% to 6% year over year.
  • Non-GAAP gross margin between 63% and 64%, and non-GAAP operating margin between 29.5% and 30.5%.
  • Non-GAAP EPS between $0.60 and $0.62.

What management had to say

Cisco CEO Chuck Robbins discussed the company's transformation:

I am pleased with the progress we are making on the multi-year transformation of our business. The Network is becoming even more critical to business success as our customers add billions of new connections to their enterprises. We are laser focused on delivering unparalleled value through highly secure, software-defined, automated and intelligent infrastructure.

CFO Kelly Kramer vowed to continue investing in growth areas, sidestepping the weak guidance:

We executed well in Q3, delivering $11.9 billion in total revenue, while driving solid profitability and cash generation as we deliver on our strategic priorities. We will continue to invest in growth areas as we move the business toward more software and recurring revenue and return value to shareholders.

Looking forward

Cisco managed only a slight revenue decline in the third quarter, and it was able to grow earnings by cutting costs. Layoffs announced last year brought down costs, and the company extended that restructuring plan in May to include an additional 1,100 employees. Pre-tax charges between $150 million and $200 million will be recognized in the fourth quarter related to that plan.

The big surprise from Cisco was the call for a steep revenue decline during the fourth quarter. Non-GAAP EPS is expected to hold up thanks to cost-cutting, but the weak revenue guidance raises some questions about the company's strategy.

Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.

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