Despite reporting quarterly total revenue declines throughout the year, Cisco (CSCO +4.79%) crushed 2017. As CEO Chuck Robbins continues Cisco's transition away from legacy network switches and routers, total revenue growth was a secondary objective.
There were several core areas that would, or wouldn't if it didn't deliver, determine the success of 2017. The good news for shareholders, and growth and income investors who haven't boarded the Cisco train yet, is the significant progress made last year. There's little doubt that about this time in 2019, another review of Cisco's annual performance will warrant even more bullishness.
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A means to an end
The writing was on the wall when Robbins took the reins two-and-a-half years ago: In-house networks were already becoming yesterday's solution. The future, which at the time Cisco had yet to embrace, was about cloud Infrastructure-as-a-Service (IaaS), data security, and the Internet of Things (IoT) solutions. Robbins wasted no time realigning Cisco's product development and business model to better suit what was coming.
Cisco crushed it in 2017 because it became evident that it was not only delivering the goods, it was gaining momentum where it counts. Last quarter -- Cisco's first for fiscal 2018, announced Nov. 15 -- was a microcosm of what investors can expect this year, and beyond.
Cisco began its new fiscal year much as it had ended the prior one: with a total revenue decline. The $12.1 billion in revenue was a 2% decrease compared to a year ago. But in Cisco's case, total sales hardly tell the story. That said, near-term investors were finally placated last quarter with Cisco's guidance of 1% to 3% revenue growth in the current period.
Thankfully for shareholders, those with an eye toward the future could see the writing on the wall, which explains Cisco's 27% jump in share price the past year. Despite its relatively strong stock performance, at just 20 times trailing earnings Cisco and its 3% dividend yield remain a bargain compared to its peer average of 33 times earnings.
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Ready and rarin' to go
One of the reasons Cisco is primed for years of growth heading into 2018 is virtually every market it's now targeting has limitless upside. IoT, data security, IaaS, and related software offerings each represent multibillion-dollar market opportunities.
A key component of Cisco's transition is driving the stable recurring revenue so many of its solutions generate. Of last quarter's $12.1 billion in sales, 32%, equal to $3.87 billion, was recurring revenue. Cisco's whopping 10% increase in deferred revenue to $18.6 in the first quarter -- a good indication of what lies ahead -- was "driven largely by subscription-based and software offers."
Of Cisco's total deferred revenue pie, products alone soared 37% year over year. In other words, Cisco is poised for continued growth in an area investors can rely on for years to come. Not all pundits applauded Cisco's decision to acquire cloud software collaboration provider BroadSoft (NASDAQ: BSFT) for $1.9 billion. But the deal for BroadSoft not only enhances its all-important recurring revenue product suite, it's a clear indication Cisco plans to keep its positive momentum going and even pick it up a notch, which bodes awfully well for the future.
And there's more
Another benefit to growing an ongoing foundation of revenue is it costs less than generating new sales, as Cisco demonstrated again last quarter. The $4.67 billion in operating expenses in the first quarter was a 7% decline year over year, leading to a 4% increase in earnings to $0.48 a share.
Return to top-line growth may have not been lightning fast by some standards, but considering Cisco's considerable transformation, it should have been expected. Of course, patience isn't always a virtue with some investors. But the reasons Cisco crushed it in 2017 are why we'll see a similar, if not even better, performance this year.
