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Cisco Feels No Tariff Pain So Far

By Timothy Green – Updated Nov 15, 2018 at 2:58PM

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The networking hardware company was able to pass off price increases without any ill effects.

Cisco Systems' (CSCO -0.20%) fiscal first-quarter report was about as good as it gets. The networking hardware specialist easily beat analyst estimates for both revenue and earnings, posting its fourth consecutive quarter of year-over-year revenue growth. Cisco's 7.7% revenue growth rate was its best in many years.

Growth across the board

Cisco produced total revenue of $13.1 billion, up from $12.1 billion in the prior-year period and about $240 million higher than analysts were expecting. Product sales were up 9% to $9.9 billion, while services sales edged up 3% to $3.2 billion.

The Cisco logo.

Image source: Cisco Systems.

All three of Cisco's major product segments produced robust growth:

Product Segment



Growth (YOY)

Infrastructure platforms

Switching, NGN routing, wireless, and data center

$7.64 billion



Collaboration, Internet of Things, and analytics

$1.42 billion




$651 million


Data source: Cisco Systems.

Cisco's bottom line grew at an even quicker rate. Non-GAAP earnings per share came in at $0.75, up 23% year over year and $0.03 higher than the average analyst estimate. A slightly higher gross margin, slow operating expense growth, a lower tax rate, and extensive share buybacks helped boost the company's per-share profits. Cisco's non-GAAP effective tax rate was 19%, down from 22% in the prior-year period.

Cisco expects this level of growth to continue. The company sees fiscal second-quarter revenue growing by 5% to 7%, excluding the impact from the divestiture of the service provider video software solutions business. Non-GAAP EPS between $0.71 and $0.73 is expected, up 14.3% year over year at the midpoint.

Tariffs are a non-event so far

There was some concern going into Cisco's report that the latest batch of U.S. tariffs on Chinese goods would hurt the company's sales or outlook as it was forced to raise prices. That doesn't appear to be the case at all. CEO Chuck Robbins explained during the earnings call: "First of all, the tariffs were immaterial to us in Q1. ... I think we implemented them with a month to go so we did not see any impact."

Robbins also threw cold water on the idea that Cisco's customers pulled forward orders to avoid higher prices: "We have talked to all of the sales leaders around the world and I could tell you there are probably only a handful of customers that have made any indication to us right now that they are doing any pull-forwards."

Cisco's products are affected by the tariffs on $200 billion of Chinese goods announced in September. The tariff rate is currently 10%, which is apparently low enough to have no impact on Cisco's business. That rate will jump to 25% at the end of the year if a trade agreement isn't reached. A 25% rate may be high enough to cause problems for Cisco.

"So, the real full big impact we'll feel when the tariffs go to 25%, if they go to 25%, will be in the third quarter. But I have baked in some incremental [sic] on both the revenue and the margin side from January," said Cisco CFO Kelly Kramer.

Cisco saw product orders rise 8% in the first quarter, which supports the notion that these tariffs so far haven't had any real effect. But if the tariff rate does jump to 25%, there's the potential for customers to delay orders in an effort to wait out the tariffs. That may not happen, but it's something to keep an eye on.

Cisco's strong results led Deutsche Bank analyst Vijay Bhagavath to boost his price target on the stock to $60, the highest among analysts that follow the company. Cisco is an "underappreciated top-line growth story," according to Bhagavath. Given the company's solid results despite trade tensions between the U.S. and China, that analysis looks spot on.

Timothy Green owns shares of Cisco Systems. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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