Networking hardware giant Cisco Systems (NASDAQ:CSCO) reported its fiscal fourth-quarter results after the market closed on Aug. 16. Revenue in the core switching and routing segments tumbled, and growth in smaller business wasn't enough to avoid a steep 4% drop in total revenue. The company's shift to subscription products is hurting near-term results, and Cisco expects another, albeit smaller, revenue decline during the first quarter of fiscal 2018. Here's what investors need to know about Cisco's fourth-quarter report.

Cisco Systems results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$12.1 billion

$12.6 billion

(4%)

Net income

$2.4 billion

$2.8 billion

(13.8%)

Non-GAAP EPS

$0.61

$0.63

(3.2%)

Data source: Cisco Systems.

The Cisco logo.

Image source: Cisco Systems.

What happened with Cisco Systems this quarter?

Revenue in every segment except wireless and security slumped, with total revenue matching the high end of Cisco's guidance.

  • Both switching and routing revenue tumbled 9% year over year, to $3.44 billion and $1.89 billion, respectively.
  • Collaboration revenue slumped 3% year over year to $1.11 billion.
  • Data center revenue dropped 4% to $837 million, while service provider video revenue fell 10% to $227 million.
  • Wireless revenue grew 5% to $799 million, and security revenue grew 3% to $558 million.
  • Recurring revenue accounted for 31% of total revenue, up 4 percentage points year over year but flat compared to the third quarter.
  • Deferred revenue rose 12% year over year to $18.5 billion. Deferred product revenue was up 23%, while deferred service revenue was up 6%. The portion of product deferred revenue related to recurring software and subscriptions surged 50%.
  • Cisco's total cash balance was $70.5 billion at the end of the fourth quarter, with $3.0 billion available in the United States.

Cisco provided the following guidance for the first quarter of fiscal 2018:

  • Revenue is expected to decline by 1% to 3% 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 $0.59 and $0.61.

What management had to say

Cisco CEO Chuck Robbins emphasized the company's progress shifting to recurring revenue:

We had another strong quarter and a transformative year. We made tremendous progress transitioning our business to more software and recurring revenue and delivered on our commitment to accelerate innovation in our core and across the portfolio. The network has never been more critical to business success and we are building the network of the future.

CFO Kelly Kramer echoed that statement: "We executed well, drove solid profitability, strong cash flow, and we continued to deliver on our strategic growth priorities. We will continue to focus on making the right bets to offer the most innovative technologies to our customers in the way they want to consume it and deliver value to our shareholders."

Looking forward

Cisco's revenue has now slumped for seven quarters in row. The company warned last quarter that weak orders from service provider and emerging market customers, as well as an uncertainty-driven slowdown from U.S. federal government customers, would hurt revenue. The shift to recurring revenue is also a factor, and the company expects this subscription push to reduce revenue growth by between 2% and 3% annually over the next three to five years.

There were signs of progress during the fourth quarter, particularly a big jump in deferred revenue related to subscription products. But it may be a while before that growth can counteract weakness in the rest of the business.