Cisco Systems (NASDAQ:CSCO) reported solid fiscal first-quarter results earlier this month, beating analyst estimates for both revenue and earnings. The core switching business grew by 5% year over year, while smaller segments, like collaboration and data center, posted double-digit growth. These revenue gains helped drive a 9.3% rise in non-GAAP EPS, well ahead of expectations.
Beyond the numbers, Cisco's conference call contained plenty of useful information for investors. Here are five things that Cisco's management wants investors to know.
The IT market has gone through quite a few changes, driven by the growth of cloud computing, and all established tech companies risk being out-innovated by smaller, nimbler competitors. Under CEO Chuck Robbins, who took the helm of the company in July, Cisco has put a renewed focus on innovation.
We are driving internal innovation at a record pace. So far in FY 2016 we're seeing a 25% increase in major new product introductions. And three of our internal start-ups brought solutions to market this quarter working with our key customers. These start-ups are bringing incredible technology from concept to delivery in under 12 months. -- CEO Chuck Robbins
In recent years, large companies have been trying to capture the speed and innovation that start-ups are known for by creating internal teams that essentially operate as start-ups. Cisco is one of these companies, and Robbins pointed to this strategy as one way that Cisco is bringing products to market more quickly.
For decades, Cisco has used a strategy known as "spin-ins," where the company is the sole investor in an external start-up founded by its own employees, with Cisco eventually buying that start-up, thus rewarding the employees. Robbins is moving away from spin-ins, instead building internal teams that aim to capture the same characteristics of a start-up. So far, this new strategy seems to be working.
Acquisitions and partnerships
Cisco has always been fairly acquisitive, snapping up smaller companies in order to build out its product and service portfolio. This strategy continues under Robbins, in addition to entering into some major partnerships:
In this quarter alone we closed three acquisitions, recently announced four new acquisitions, and formed three new strategic partnerships. Partners like Apple, Inspur, and Ericsson see Cisco as the market leader they want to work with to move faster and drive greater value to customers and the market. I believe we will see several points of growth from these partnerships over the next few years. -- Robbins
Cisco has made quite a few acquisitions in the security space over the past few years, and during the quarter, the company announced two more -- Portcullis and Lancope -- in addition to closing its previously announced acquisition of OpenDNS. Cisco also announced a couple of significant partnerships. In August, Cisco partnered with Apple to optimize its networking hardware for the iPhone and iPad, and earlier this month, Cisco and Ericsson teamed up in a deep partnership that promises an incremental revenue opportunity of $1 billion or more by 2018.
While the growth of cloud computing, particularly public clouds, is viewed as a threat to Cisco, the company's focus on private clouds is paying off:
Within the enterprise, we are winning in private cloud and are focused on automating and driving public cloud economics across our customers' entire infrastructure. We saw this opportunity drive 24% growth in UCS. And our next-generation data center switching portfolio, which is our Nexus 3000, Nexus 9000, and ACI, is now at a $2 billion run rate, with over $500 million in revenue this quarter, growing over 140% year over year with sequential growth of 26%. This performance is much stronger than that of our competitors, who claim they are outpacing and outperforming us. -- Robbins
Cisco has become one of the top server vendors in the world with its UCS line of servers, tied for fourth globally during the second quarter of 2015. The data-center segment is still a small part of Cisco, accounting for a little less than 7% of revenue during the latest quarter; but it's the faster-growing segment, and there's plenty of room to continue to win market share.
Cisco's latest line of switches, which support Application Centric Infrastructure, Cisco's take on software-defined networking, is also growing fast. ACI has some major competitors, including NSX from VMWare; but even in cases where an alternative is used, many clients are running the software on top of Cisco's hardware. The networking needs of Cisco's clients are changing, but Cisco has taken steps to ensure that it remains the overwhelming market leader.
Cisco, the software company
Cisco is mainly known for its networking hardware, but software is becoming more important for the company:
As we deliver more of our portfolio in software and cloud models, we are driving consistent double-digit growth in deferred revenue. We saw software and subscription product deferred revenue up 36%. Security deferred revenue grew 31%, as we sell next-generation firewall and threat defense software to our over 200,000 firewall customers. Our collaboration deferred revenue grew 18%. And our Meraki cloud networking business, where we deliver networking-as-a-service, grew revenue over 60%. -- Robbins
Cisco is shifting toward being a provider of solutions, not just hardware, and the company expects software to be a key driver of its growth going forward. During the next three to five years, the company expects software revenue to grow by 10%-15% annually, and by 2020, software could account for more than one-quarter of Cisco's total revenue.
Software generally carries higher margins than hardware, and this shift could lead to Cisco becoming more profitable over time.
Emerging markets are coming back to life
One of Cisco's major challenges during the past couple of years has been weak sales in emerging markets. During the first quarter of the previous fiscal year, sales in emerging markets slumped 6% year over year, with sales in the APJC region declining by 12%, and sales in the BRICS plus Mexico region also falling 12%. In the first quarter of this year, the situation improved dramatically:
Looking at our geographies, which is the primary way we run our business, Americas grew 1%, EMEA grew 3%, and APJC was up 9%. Total emerging markets grew a very solid 11%, with the BRICs plus Mexico accelerating to 21% growth. -- CFO Kelly Kramer
Unfortunately, Cisco's guidance for the second quarter was weaker than expected, with the company calling for revenue growth of just 0%-2%, citing an uncertain macroeconomic environment. This strong growth in emerging markets may not continue into the second quarter.