Networking giant Cisco Systems (NASDAQ:CSCO) reported its fourth-quarter and full-year results after market close on Aug. 12. The company managed to beat analyst estimates for both revenue and earnings, driven by steady growth in its core switching and routing businesses and strong performance from the data-center segment.
Cisco reported quarterly revenue of $12.8 billion, up 4% year over year and $150 million higher than analysts were expecting. Non-GAAP EPS rose to $0.59, a 7.3% year-over-year increase, and $0.03 better than the average analyst estimate. On a GAAP basis, EPS rose 4.7% year over year to $0.45.
A breakdown of Cisco's growth
The Americas accounted for all of Cisco's revenue growth during the quarter, with revenue rising by 7% year over year in the region. Revenue was flat in both the EMEA and APJC regions, marking a continuation of Cisco's difficulties in certain emerging markets.
Both the switching business and the routing business, which together accounted for about 44.5% of Cisco's revenue, grew during the quarter. Switching revenue rose 2% year over year to $3.72 billion, while routing revenue increased 3% to $1.99 billion.
Cisco's data-center segment, which includes its UCS servers, grew by 14% year over year, reaching $880 million of revenue. The data-center segment is one of Cisco's fastest-growing businesses, and Cisco has managed to become a major player in the server market over the past few years.
The security business didn't fare quite as well for Cisco, growing by only 4% year over year, far slower than the full-year growth rate of 12%. Security is another important growth area for Cisco, but the performance of the segment has tended to be quite lumpy.
Cisco grew its operating expenses by just 2.7% year over year, allowing earnings to grow at a faster rate than revenue. GAAP operating margin was 22.4%, up from 21.7% during the same period last year. GAAP gross margin also increased year over year to 60.2%, up from 59.9% during the fourth quarter of 2014.
A new CEO and a shift to software
This was the first earnings report issued under new CEO Chuck Robbins, who took charge of the company in July. As Robbins explains, Cisco is transitioning into a more software-centric company:
I'm stepping into the CEO role at an incredibly exciting time for Cisco. We closed out our fiscal year with record revenues and record non-GAAP EPS, for both Q4 and FY15. I'm particularly pleased with the strong growth of deferred revenue which shows we are very effectively driving our business to a more predictable software-based business model, at the same time as growing revenues and earnings.
Cisco's deferred revenue balance sat at $15.2 billion at the end of the fourth quarter, up 7% year over year, with product deferred revenue growing by 21%. Much of this growth was driven by subscription and software offerings, and Cisco has previously stated that it expects to grow software revenue at a compound annual growth rate of 10% to 15% over the next three to five years.
Hardware will certainly remain the core of Cisco's business, but software offers the potential of both higher margins and a more predictable revenue stream. Offering integrated solutions, involving hardware, software, and services, instead of simply selling hardware, is the future of Cisco.
Cisco's results for the fourth quarter were strong, and its guidance points to continued growth going forward. The company expects revenue to grow by 2%-4% during the first quarter, with non-GAAP EPS between $0.55 and $0.57, both in line with analyst estimates. There are still some problems, such as certain emerging markets and the service provider business, but overall, Cisco had a great quarter.
Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.