Unlike some of its counterparts, including beleaguered cloud Infrastructure-as-a-Service (IaaS) and software provider HP Enterprise (NYSE:HPE), Cisco (NASDAQ:CSCO) ended 2017 on a high note. Cisco not only reported a strong fiscal 2018 first quarter; expectations are even higher in the current period.
Though its recent quarter and guidance gave Cisco stock a lift, a closer look reveals there were plenty of other results that bode well for 2018. That said, Cisco's transition away from legacy networking switches and routers is far from over. The question of whether Cisco is a buy in 2018 depends on whether it continues making progress where it counts.
Laying the foundation
It will be three years in May since Chuck Robbins took over as Cisco CEO. Robbins wasted no time letting shareholders know what his plans were. Cisco's transitioning into new markets, becoming more efficient, and building a sustainable foundation of revenue were all at the top of Robbins' priority list.
Cisco no longer reports individual product sales each quarter. But prior to the reporting change, routers and switches were sinking every quarter, with strength in IaaS, the Internet of Things (IoT), and software all growing. Presumably, Cisco's IaaS platform unit's 4% drop in revenue to $6.97 billion last quarter includes its legacy products.
It's no easy feat successfully completing a transformation as comprehensive as Cisco's: Just ask HP Enterprise. It's been over two years since the split with HP, and HP Enterprise still hasn't found its footing. The CEO swap on Feb. 1 to Antonio Neri demonstrates how tough change can be. Yet, Cisco is already rounding the corner while competitors like HP Enterprise continue to struggle.
Though IaaS sales declined 4%, Cisco's $12.14 billion in total revenue was a mere 2% decline compared to a year ago. Most of the IaaS shortcoming was made up by a 6% rise in application revenue to $1.2 billion, much of which was packaged with Cisco's IaaS platform sales.
Security sales climbed 8% to $585 million and are slowly becoming a larger piece of Cisco's total revenue each quarter. Cisco's cloud software offerings will expand further following the $1.9 billion acquisition of BroadSoft (NASDAQ: BSFT). The strength of Cisco's "new" units is largely responsible for its guidance of a return to revenue growth this quarter (fiscal second quarter of 2018) of 1% to 3%.
When less is more
In keeping with its new business focus, Cisco has implemented a series of layoffs, including its latest of 310 workers from its San Jose, California headquarters in October. Cutting jobs is never fun, but in Cisco's case its transition resulted in redundancies. The upside is that Cisco expects a return to top-line growth and its earnings per share (EPS) are improving.
Despite the slight drop in total revenue, thanks to shaving 7% off its operating expenses to $4.7 billion, Cisco's EPS rose 4% over last year to $0.48 a share in the first quarter. The EPS growth was in conjunction with Cisco raising its per-share dividend payout 13% year over year to $0.29. Cisco's 2.8% dividend yield is one of the best of its peer group.
Save the best for last
The added benefit of Cisco's software and cloud IaaS sales is those sales building a foundation of recurring revenue. In 2018's fiscal first quarter, 32% of Cisco's total revenue was recurring, up three percentage points over last year. That means that $3.87 billion of Cisco's sales were generated by sources shareholders can rely on in the months and years ahead.
Investors can expect Cisco's recurring revenue to continue climbing, too. Cisco ended its first quarter with $18.57 billion in deferred sales, a 10% improvement compared to a year ago, and that wasn't the best news. Of its total deferred revenue, $5.2 billion was recurring, a whopping 37% jump.
As you may have guessed, the answer to the question, "Is Cisco a buy in 2018?" is a resounding "yes." Though timing the market is generally a losing game, 2018 is the time for conservative growth and income investors to get off the fence and buy into Cisco.