Networking hardware giant Cisco Systems (CSCO +0.93%) recently reported its fiscal second-quarter earnings. The company blew past analyst estimates for both revenue and earnings, provided revenue guidance that was above expectations, and greatly increased its dividend and share buyback program. There were some weak spots, but overall, it was a solid quarter for Cisco.
There's more to Cisco's results than the numbers themselves. During the company's conference call, management provided additional information that completes the picture for investors. Here are five quotes from management, from the transcript provided by Thomson Reuters, that investors need to see.
Embracing software-defined networking
One threat to Cisco's core business that has reared its head over the past few years is software-defined networking, where commodity networking hardware is combined with software. The risk is that Cisco sees its hardware gross margins begin to decline, as cheap alternatives eat away at the company's business model. Cisco hasn't been standing still, though, and its own take on software-defined networking, Application Centric Infrastructure, is doing well, according to CEO Chuck Robbins:
In just two years, we have built ACI to a $2 billion run rate business that grew once again last quarter over 100%. We are aggressively focused on winning in the 10-gig, 40-gig and 100-gig transition and firmly establishing our leadership in the next-generation data center.
The ACI platform, which includes the company's Nexus switches and routers, has been growing at a breakneck pace, even as it crosses the $2 billion annual run rate mark. NSX from VMware (VMW +0.00%) is Cisco's biggest competitor on the software side. During 2015, VMware reported that NSX achieved an annual bookings run rate of over $600 million, while the NSX business grew by over 100%. It's too early to say whether Cisco's ACI or VMware's NSX will win the battle, but the good news for Cisco is that customers are using its hardware even if they choose VMware's software.
Uncertainty is a problem
Cisco's business is driven by its customers upgrading their infrastructures, but with macroeconomic uncertainty seeming to be the theme of 2016 so far, Robbins explains that many customers are taking a wait and see approach:
They paused a bit, and you see customers say -- I want to just wait and see what is going on. Let me take a look at this. We want to understand this a little better. I think to Kelly's point when she talked about the switching business, the campus refresh opportunities that have been actually pretty consistent for us over the last few quarters, we saw customers say, hey, our infrastructure is working so we're going to hold on that for some period of time and let's see where things go.
Cisco's switching business suffered a 4% year-over-year decline in revenue during the second quarter, and the data center business, which has been growing by double-digit rates, suffered a 3% decline. Given all of the headwinds facing Cisco, including macroeconomic uncertainty and currency fluctuations that are plaguing other global companies, the fact that Cisco is still managing to grow revenue is impressive. This slowdown in the switching business appears to be a temporary one, and while this weakness may drag on for a while, it's largely beyond Cisco's control.
China is growing again
Emerging markets have been a problem for Cisco in recent years, with China being particularly ugly. During the second quarter of fiscal 2015, for example, China sales slumped 19% year over year. Reports that the NSA was intercepting Cisco's networking hardware and installing surveillance firmware in 2014 certainly didn't help Cisco's business overseas, but it seems Cisco has managed to turn its business in China around. According to Robbins:
The good news is what I will tell you is that the growth we saw in China was very well balanced across our portfolio. We saw routing up -- Kelly, keep me honest. But, routing in double digits. Switching in double digits. Wireless in double digits as well as SP video in double digits. It was a very balanced performance for the second quarter in a row. There's clearly a lot of uncertainty out there so we're going to take things a quarter at a time, but we are pleased with where they are.
Product orders in China grew by 64% during the second quarter, following a 40% rise during the first quarter. Emerging markets collectively produced 7% growth, while the BRICs plus Mexico posted 70% product order growth. While a couple years of declines make for easy comparisons, the worst for Cisco in China may be over, barring some sort of economic meltdown.
About that data center decline
In recent years, Cisco's data center segment, which includes the company's UCS line of servers, has been growing at a blistering pace. During the first quarter, the data center segment posted 24% year-over-year revenue growth, and as of the third calendar quarter of 2015, Cisco was the fifth largest server vendor in the world. This makes the 3% decline in data center sales during the second quarter all the more shocking. Robbins puts it in perspective:
That data center business has a strong buying season that actually runs into the end of December, and while it is a fantastic franchise for us that has contributed and will contribute to not only our success in the data center in the past but also in our success in the next-gen data center as we build next-generation data center stacks going forward. But, it also -- we also believe that in the December quarter that we actually still gained share with that performance.
Server market data for the fourth quarter hasn't been released yet; the latest from IDC shows that global server revenue grew 5.1% during the third calendar quarter. Cisco believes it gained market share during the fourth calendar quarter, which means the global server market likely slumped toward the end of 2015. We'll have to wait for more data to see where Cisco stands following a difficult quarter for its data center business, but at the moment, it doesn't look like the decline in data center sales is a Cisco-specific problem.
More dividends and share buybacks
In addition to reporting its second-quarter results, Cisco announced a major dividend increase as well as an increase in its share repurchase authorization. CFO Kelly Kramer fills in the details:
Today, we announced a 24%, or $0.05 increase to the quarterly dividend to $0.26 per share. This represents a yield of approximately 4.6% based on today's closing price. We also announced a $15 billion increase to the authorization of the share repurchase program raising the remaining share repurchase authorization to approximately $16.9 billion. This significant dividend increase and additional share repurchase authorization reinforces our commitment to returning capital to our shareholders and our confidence in the strength and stability of our ongoing cash flows.
Cisco's projected dividend yield is a bit lower now, at about 4.15%, thanks to the stock's post-earnings surge, but that's still well above the dividend yields of many other large technology stocks. The increased buyback authorization isn't a surprise, as Cisco has been actively buying back its shares for quite some time. Cisco aims to return at least 50% of its free cash flow to shareholders each year, and with the 24% dividend increase, the dividend alone nearly hits that target.
