Networking-hardware provider Cisco Systems (NASDAQ:CSCO) reported its fiscal second-quarter results after the market closed on Feb. 14. The company produced revenue growth for the first time in two years, and it guided for even quicker growth during its third quarter. Along with reporting its results, Cisco announced a double-digit dividend increase and a massive new share-buyback authorization, fueled by the repatriation of $67 billion of cash. Here's what investors need to know about Cisco's second-quarter report.

Cisco Systems results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$11.9 billion

$11.6 billion

2.7%

Net income

($8.8 billion)

$2.3 billion

N/A

Non-GAAP EPS

$0.63

$0.57

10.5%

Data source: Cisco Systems. EPS = Earnings per share.

The Cisco logo on a sign in front of a Cisco facility.

Image source: Cisco Systems.

What happened with Cisco Systems this quarter?

Cisco returned to revenue growth after a two-year hiatus:

  • Cisco reported a year-over-year increase in revenue for the first time since late 2015.
  • The company recorded an $11.1 billion charge related to the enactment of the Tax Cuts and Jobs Act. Cisco's GAAP numbers include this charge, while its non-GAAP numbers back it out.
  • Product revenue jumped 2.6% year over year to $8.7 billion. Service revenue rose 2.9% to $3.2 billion.
  • The infrastructure platforms segment produced $6.7 billion of revenue, up 2% year over year.
  • The applications segment produced $1.2 billion of revenue, up 6% year over year.
  • The security segment produced $558 million of revenue, up 6% year over year.
  • The other products segment produced $273 million of revenue, down 10% year over year.
  • Cisco's recurring revenue was 33% of total revenue during the quarter, up from 31% in the prior-year period.
  • Deferred revenue was $18.8 billion, up 10% year over year. Deferred product revenue jumped 19%, with the deferred product revenue related to recurring software and subscriptions up 36%.
  • Cisco closed the acquisition of BroadSoft during its fiscal third quarter.

Cisco boosted its dividend and vastly increased the size of its share-buyback program:

  • Cisco plans on repatriating $67 billion of off-shore funds to the U.S. during the fiscal third quarter.
  • The quarterly dividend was raised 14% to $0.33 per share.
  • The share-repurchase program authorization was raised by $25 billion, bringing the total authorization to $31 billion. Cisco plans to exhaust this authorization within two years.

Cisco provided the following guidance for the fiscal third quarter:

  • Revenue growth between 3% and 5% year over year.
  • Non-GAAP tax rate of 21%.
  • Non-GAAP EPS between $0.64 and $0.66.
  • Guidance includes impact of the BroadSoft acquisition.

What management had to say

During the earnings call, Cisco CEO Chuck Robbins discussed the success of the Catalyst 9000 switching platform: "We saw strong adoption of our subscription-based Catalyst 9000 switching platform, as we more than doubled our customer base from last quarter to over 3,100 customers. This is the fastest ramping new product introduction we've had in our history, and a fantastic example of the innovation we've delivered over the past two years."

CFO Kelly Kramer talked about the company's capital allocation plans:

From a capital allocation perspective, we're going to continue to be looking for the acquisitions that we can drive value and drive growth with. We're going to continue to support the dividend and drive that up with earnings, like you saw us do today. We're going to, again, give back cash now that we have all of our cash basically is repatriated all the time now. We're going to be giving back to the shareholders through a healthy buyback and I think we've got $30 billion to work through to do that. We'll keep you updated as we go through this every quarter.

Looking forward

Cisco's shift toward subscription revenue is part of the reason why its revenue has been declining for the past two years. Revenue that would have otherwise been recognized up front was being pushed into the future, creating a revenue headwind that the company has just now overcome. Cisco expects even stronger revenue growth in its third quarter.

Cisco's $25 billion share-repurchase authorization is enough to buy back about 12% of all outstanding shares. That will provide a nice boost to per-share earnings over the next couple of years, which will allow the company to continue raising the dividend faster than the rate of earnings growth.

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