Cisco Sees Revenue Growth Returning Next Quarter

Networking hardware provider Cisco Systems (CSCO 0.44%) reported its fiscal first-quarter results after the market closed on Nov. 15. While revenue slumped for an eighth straight quarter, Cisco guided for a return to growth in the second quarter. The company's shift to subscription products is still knocking down revenue, but it expects to overcome that headwind and put an end to its streak of revenue declines. Here's what investors need to know about Cisco's first-quarter report.

Cisco Systems results: The raw numbers

Data source: Cisco Systems.

Image source: Cisco Systems.

What happened with Cisco Systems this quarter?

Cisco changed its reporting segments starting in the first quarter. Here's what each new segment includes:

• Infrastructure platforms: Switching, NGN routing, wireless, and data center.
• Applications: Collaboration, Internet of Things, and analytics.
• Security: Unchanged.
• Other products: Service provider video and other products, excluding Internet of Things and analytics.
• Services: Unchanged.

Revenue dipped in the first quarter, with a slump in the infrastructure platforms segment partially offset by growth in other segments.

• Infrastructure platforms revenue was $6.97 billion, down 4% year over year.
• Applications revenue was $1.20 billion, up 6% year over year.
• Security revenue was $585 million, up 8% year over year.
• Other products revenue was $296 million, down 16% year over year.
• Services revenue was $3.08 billion, up 1% year over year.
• Cisco's recurring revenue reached 32% of total revenue during the quarter, up 3 percentage points year over year.
• Deferred revenue was $18.6 billion, up 10% year over year. Deferred product revenue rose 16%, driven by a 37% increase in deferred revenue related to software and subscription products.
• Cisco's total cash, cash equivalents, and investments reached $71.6 billion, up from $70.5 billion at the end of the fourth quarter of fiscal 2017. Cash held in the United States was $2.5 billion.
• Cisco announced the acquisition of privately held Springpath Inc. and Perspica Inc. during the first quarter. The company also closed its acquisition of Viptela Inc. and Observable Networks Inc. In October, Cisco announced the acquisition of BroadSoft Inc. for $1.9 billion.

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

• Revenue is expected to grow by 1% to 3% year over year.
• Non-GAAP gross margin between 62.5% and 63.5%, and non-GAAP operating margin between 29.5% and 30.5%.
• Non-GAAP EPS between $0.58 and $0.60.
• This outlook does not include any impact from the pending acquisition of BroadSoft.

What management had to say

Cisco CEO Chuck Robbins discussed the success of the new Catalyst 9000 switching platform during the conference call: "Our new subscription-based Catalyst 9000 switching platform has been adopted by more than 1,100 customers in just over three months. We expect continued momentum throughout fiscal 2018, and we're pleased that the vast majority of Catalyst 9000 customers are buying our most advanced software subscription offer."

CFO Kelly Kramer gave an update on the revenue headwind created by the company's shift to subscription products: "[R]ight now it's in that 2% range -- 1.5% to 2% range, and we expect that to be roughly in that range next quarter as well."

Kramer also commented on the company's plans if a tax reform bill passes: "So like we said in the past, when that happens, and if we get a repatriation, which both plans currently have, we're going to continue like we have, growing our dividend with our earnings growth and where we have opportunity is really to get much more aggressive than we have been on the share buyback. And, of course, we want to make sure we continue to have enough fire power to continue to be able to do the right acquisitions to help us position Cisco right for the long term."

Looking forward

While Cisco's revenue slumped during the first quarter, marking the eighth quarterly decline in a row, the company's guidance calls for a return to growth. Cisco's push into subscriptions, particularly in fast-growing businesses like security but also in core businesses like switch, is knocking down revenue in the short term. But those efforts look like they're starting to pay off.

That headwind will persist, and even potentially grow as Cisco continues to ramp up its subscription efforts. But the company sees this shift to subscriptions as the right strategy to maintain its dominance in the networking hardware market and to grow its presence in other markets like security and collaboration.