Shares of Cisco (NASDAQ:CSCO) recently rallied after the networking giant released fiscal fourth quarter 2018 numbers that topped analyst expectations. Revenue rose 6% against the prior-year quarter to $12.85 billion, beating expectations by $80 million. Cisco's non-GAAP earnings per share (EPS) grew 15% to $0.70, clearing estimates by a penny. On a GAAP basis, EPS jumped 69% to $0.81, though that growth was inflated by a one-time tax reform benefit.

Networking connections across the globe.

Image source: Getty Images.

For the full year, Cisco's revenue rose 3% to $49.3 billion as its non-GAAP EPS grew 9%, yet GAAP earnings dropped 99% due to a one-time tax-related charge. Specifically, Cisco took advantage of the recent U.S. tax legislation to repatriate $67 billion in cash from overseas accounts during the year, which resulted in a $9 billion tax bill.

For the first quarter of its fiscal 2019-year, Cisco expects 5%-7% sales growth and 15%-18% non-GAAP earnings growth. This rosy guidance, issued alongside fourth-quarter earnings, easily topped analyst expectations for 4% sales growth and 13% earnings growth.

Those are impressive growth figures for Cisco, which is often considered a slow-growth tech stock. But should investors chase its post-earnings rally?

The key numbers

Cisco's product revenues rose 7% in the fourth quarter to $9.6 billion, and its service revenues climbed 3% to $3.2 billion. Recurring revenues, which are driven by software subscriptions instead of hardware sales, accounted for 32% of total company revenue, compared to 31% in the prior-year quarter.

All three of Cisco's core products businesses -- infrastructure platforms (routers, switches, and other networking products), software applications, and security -- posted solid year-over-year growth. Here's how those businesses fared over the past four quarters:

 

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Infrastructure

(4%)

2%

2%

7%

Applications

6%

6%

19%

10%

Security

8%

6%

11%

12%

Table displays year-over-year revenue growth. Source: Cisco quarterly reports.

The acceleration of Cisco's infrastructure business matters the most, since it accounted for 77% of products revenue and 58% of total company revenue during the fourth quarter.

Cisco attributed infrastructure growth to strong sales of switches in the enterprise campus market (particularly its Catalyst 9000 series), robust demand for its Meraki and Wave 2 wireless products, and solid sales of its servers and HyperFlex products for data centers. Expansion was slightly offset by waning sales of routers, which face tougher competition from cheaper rivals and the rise of generic "white box" routers.

Servers in a data center.

Image source: Getty Images.

Cisco's applications revenue was boosted by the strength of its unified communications, telepresence, conferencing, and AppDynamics software platforms. Security revenue gained from strong demand for network security, unified threat, policy and access, and web security solutions. Cisco's recent purchase of cybersecurity firm Duo, which specializes in two-factor authentication, should support that growth.

Cisco's top-line improvement also remained strong across all three of its main geographic regions. Revenues in the Americas rose 5% during the quarter and accounted for 59% of Cisco's top line.

EMEA (Europe, Middle East, and Africa) revenue grew 8% and accounted for 25% of the company's top line. APJC (Asia-Pacific, Japan, and Greater China) revenue rose 6% and accounted for the remaining 16% of company sales.

But mind the margins and the competition

Cisco's growth looks solid, but its gross margins declined year-over-year across the board:

Non-GAAP:

Q4 2017

Q4 2018

Product gross margin

61.9%

61.5%

Service gross margin

68.8%

67.1%

Total gross margin

63.7%

62.9%

Source: Cisco quarterly reports.

Cisco blamed segment declines on specific lower-margin deals and a negative product mix in the APJC region, which offset expanding margins in the Americas and EMEA regions. But looking ahead, Cisco expects its total gross margin to rebound sequentially to 63%-64% in the first quarter.

That's reassuring, but investors should remember that Cisco still faces tough competition from hungry competitors like Huawei and Arista Networks (NYSE:ANET), which specializes in high-speed switches for white box networks.

Arista is much smaller than Cisco, but it's also growing at a much faster rate -- analysts expect its sales and earnings to rise 29% and 31%, respectively, this year. Arista constantly claims that its switches, supported by cloud-based networking solutions, can replace traditional routers, which could spell trouble for Cisco's products division in the future.

What's next for Cisco?

Of the $67 billion in overseas cash which Cisco repatriated earlier this year, most of it is earmarked for share repurchases and dividends, and the rest will likely be spent acquiring more high-growth software and security companies like Duo.

This means that Cisco has plenty of room to repurchase shares, raise its dividend, and diversify its business away from hardware products. In the fourth quarter, the organization spent $6 billion on share buybacks and paid out $1.5 billion in dividends. It's also acquired (or agreed to acquire) more than a dozen companies since the beginning of 2017.

Cisco pays a forward dividend yield of 3.1%, and its stock trades at just 14 times forward earnings. Meanwhile, the company's solid fourth quarter numbers and guidance indicate that shares are still a worthy buy -- even though they've already rallied nearly 40% over the past 12 months.

Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Arista Networks. The Motley Fool has a disclosure policy.