Networking giant Cisco Systems (NASDAQ:CSCO) is set to report its fiscal fourth-quarter results after the market close on Wednesday, Aug. 12. This will be the first earnings report issued under new CEO Chuck Robbins, who took the helm toward the end of July. Cisco returned to growth earlier this year after a few quarters of weakness, and analysts are expecting both revenue and earnings to grow during the fourth quarter. Here are three things investors should pay attention to when Cisco reports earnings.
Emerging markets and service providers
One of the biggest problems for Cisco over the past couple of years has been its weak performance in certain emerging markets. During the third quarter, product orders were flat in emerging markets overall, but problems persisted in specific countries. Product orders in Russia fell 41% year over year, Brazil was down 10%, and China was down 20%. Strength in other countries, like Mexico and India, counteracted this weakness, but Cisco's growth in recent quarters has been coming entirely from developed markets.
Product orders from the service-provider segment have also been a weak spot for Cisco. During the third quarter, service-provider orders declined by 7% year over year. While product orders grew by 2% overall during the third quarter, if emerging markets and the service-provider segment is excluded, orders grew by a much faster 8%.
Cisco expects both volatility in emerging markets and weakness in the service-provider segment to continue, and investors should expect any kind of turnaround in those areas to take time. The upside is that Cisco is growing even without those areas performing well, and any improvement during the fourth quarter could provide a significant boost to Cisco's results.
Data center and security
Two of Cisco's fastest-growing segments are its data center and security businesses. Over the past few years, Cisco has grown into a major server vendor, with its UCS, or Unified Computing System, reaching a $3 billion annual run rate during the third quarter, with nearly 44,000 customers. Data-center revenue grew by 21% year over year during the third quarter, and while it represents only about 6.6% of the company's total revenue, it's Cisco's fastest growing segment.
Security is the second fastest growing segment, and it's an area where Cisco is making acquisitions in order to fuel growth. The company acquired Sourcefire back in 2013 for $2.7 billion, and since then Cisco has made a variety of smaller acquisitions to build out its security offerings. In June, for example, Cisco announced the acquisition of OpenDNS, a security software company, for $635 million.
Cisco's security business grew by 14% year over year during the third quarter, bringing in $412 million of revenue. The company is the leader in the security appliance market, which accounts for the bulk of Cisco's security revenue, but software and services are becoming increasingly important. Investors should look for continued double-digit growth in the security business during the fourth quarter, as well as any discussion from management during the conference call on the progress of Cisco's various security products, particularly software.
Core switching and routing
The most important part of Cisco's business is switching and routing. Combined, these two segments accounted for about 46% of revenue during the third quarter. Cisco enjoys a dominant market share, particularly in switching, where it controls about two-thirds of the market.
During the third quarter, the switching and routing segments grew by 6% and 4%, respectively. Cisco's Application Centric Infrastructure, essentially the company's answer to software-defined networking, has been building momentum, with its Nexus 3K and 9K switches growing by 144% year over year during the third quarter. While Cisco is increasingly turning to software and services to fuel growth, switching and routing remains the core of the business, and investors should look closely at the performance of these two segments during the fourth quarter.
If Cisco's fourth quarter is anything like its third quarter, then investors will have a lot to like. Problems in emerging markets and the service-provider segment will probably persist, but a strong core business coupled with fast-growing segments such as data center and security should allow Cisco to grow revenue and earnings despite these challenges.