Shares of Cisco (CSCO -0.37%) recently rallied after the networking hardware giant posted impressive first quarter numbers that beat estimates on the top and bottom lines. Its revenue rose 8% annually to $13.1 billion, clearing expectations by $240 million and representing the company's third straight quarter of accelerating sales growth.

Cisco's non-GAAP net income rose 14% to $3.5 billion as its EPS jumped 23% to $0.75 per share, topping estimates by three cents. On a GAAP basis, its net income rose 48% to $13.1 billion and its EPS surged 60% to $0.77 per share.

Network connections across a city.

Image source: Getty Images.

For the second quarter Cisco expects its revenue to rise 5% to 7%, and for its non-GAAP EPS to grow 13% to 16%. Both figures are in line with analyst expectations. Let's dig deeper to understand how this tech giant -- once known for its anemic growth -- started generating impressive revenue and earnings growth again.

Breaking down the key numbers

Here's how much Cisco's top and bottom line growth accelerated over the past year.


Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019













YOY growth. *Non-GAAP. Source: Cisco quarterly reports.

That impressive turnaround can be attributed to four main catalysts. First, demand for its Infrastructure (routers, switches, wireless devices, and other hardware) products rose as enterprise campus and data center customers upgraded their networks. Cisco's Infrastructure revenue rose 9% annually during the quarter, and accounted for 58% of its top line.

Second, Cisco aggressively expanded its higher growth Applications and Security businesses with investments, new products, and acquisitions like Broadsoft and Duo Security. Its Applications revenue rose 18% during the quarter as its Security revenue grew 11%. Those two businesses now account for 16% of Cisco's top line.

Third, Cisco invested heavily in the growth of its recurring services to lock in customers, reduce its dependence on hardware sales, boost its margins, and widen its moat against its rivals. Recurring revenues now account for about a third of Cisco's revenues. Cisco's revenue from software after subscriptions accounted for 57% of its total software revenues during the quarter.

An IT professional checks a tablet.

Image source: Getty Images.

Lastly, Cisco's repatriation of $67 billion in overseas cash earlier this year gave it a lot of cash for buybacks, dividends, and domestic acquisitions. Cisco bought back $5 billion in shares during the first quarter, which significantly boosted its EPS, and spent $1.5 billion on dividend payments.

Expanding margins

Cisco's gross margins also expanded year-over-year across the board.


Q1 2018

Q1 2019










Non-GAAP gross margins. Source: Cisco quarterly reports.

A ten basis point improvement in its total gross margin might seem mediocre, but it's impressive when we consider that Cisco faces intense competition from big rivals like Huawei, disruptive challengers like Arista Networks (ANET -0.25%), and smaller competitors like Juniper Networks (JNPR 0.14%).

That margin expansion indicates that Cisco's classic strategy of bundling together its hardware and software to lock in big customers still works. CEO Chuck Robbins also called the impact from tariffs "immaterial" to its first quarter numbers during the conference call. For the second quarter, Cisco expects its non-GAAP gross margin to come in between 63.5% to 64.5%.

A low valuation and a high dividend

Analysts expect Cisco's revenue and earnings to rise 5% and 15%, respectively, this year. Based on that forecast, Cisco trades at just 15 times this year's earnings.

For comparison, Arista trades at about 30 times this year's earnings. Juniper -- which faces negative earnings growth this year -- trades at 15 times that estimate. Therefore it's safe to say that Cisco is cheap relative to its industry peers and its earnings growth potential.

Cisco also pays a forward dividend yield of 2.9%. It's raised its payout annually for seven straight years, and its repatriated cash gives it plenty of room for future hikes. Arista doesn't pay a dividend, and Juniper pays a lower forward yield of 2.4%.

A simple stock for a complicated market

It can be tough to find reliable stocks in today's choppy market, but Cisco's steady growth, wide moat, high dividend, and low valuation make it a solid stock for uncertain times. I personally own shares of Cisco, and I don't plan to sell my shares anytime soon.