Cisco Systems CSCO delivered third-quarter fiscal 2019 non-GAAP earnings of 78 cents per share which beat the Zacks Consensus Estimate by a penny. Further, the figure rose 18.2% from the year-ago quarter.
Revenues increased 6% year over year, excluding Service Provider Video Software Solutions (“SPVSS”), to $12.958 billion and surpassed the Zacks Consensus Estimate of $12.875 billion. Acquisitions contributed 40 bps to the top line in the reported quarter.
Strength witnessed in the company’s Security and Applications segments drove year-over-year growth. Order strength and improving traction of the subscription-based model were other tailwinds.
Notably, during the second quarter of fiscal 2019 the company completed the divestiture of its SPVSS business.
Shares of the company have gained 20.7% in a year’s time, outperforming the industry’s rally of 17.2%.
Products (75% of total revenues) advanced 7% to $9.72 billion.
Services (25%) increased 3% to $3.24 billion, driven by growth in software and solutions services.
Revenues from subscriptions represent 65% of the company’s software revenues, up 9 points year over year.
Deferred product revenues were $6.2 billion, down 22.9% from the year-ago quarter. Deferred service revenues were $11.3 billion, up 3.1% from the year-ago quarter.
Geographically, Americas revenues were flat year over year, while EMEA and APJC reported revenue growth of 9% and 5% on a year-over-year basis, respectively. While total emerging markets grew 5%, the BRICs plus Mexico declined 2%.
In terms of customer segments, enterprise increased 9%, while service provider was down 13%. Further, commercial and public sector rose 5% and 10%, respectively.
Total product orders increased 4%. Cisco has realigned Product segments into four distinct categories — infrastructure platform, applications, security, and other.
Wireless, Switching Aids Growth
Infrastructure Platforms (58.2% of third-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues grew 5% from the year-ago quarter to $7.545 billion.
The year-over-year increase can primarily be attributed to robust growth across switching, wireless and data center business. Switching revenues witnessed robust growth across campus and data center. Adoption of new campus switch, Cat9K and Nexus 9K was impressive.
Routing witnessed robust growth, primarily on account of SD-WAN. Further, wireless revenues improved on the back of company’s Wave 2 offerings and Meraki solution. Robust demand for the HyperFlex data-center solution drove data center’s double-digit growth.
Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by several customers, which aided them in becoming more flexible. Moreover, results benefited from persistent customer shift from 100G to 400G architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.
AppDynamics Drive Growth
Applications (11% of third-quarter revenues) consist of Collaboration portfolio of Unified Communications (“UC”), Conferencing and TelePresence, IoT and application software businesses such as AppDynamics and Jasper. Revenues increased 9% from the year-ago quarter to $1.431 billion.
The company had integrated its Cisco Spark with Webex Platform which enhanced Webex Meeting and enabled it to introduce Webex Teams, fortifying the company’s collaboration portfolio further.
Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.
Cisco recently unveiled AIOps, leveraging AI, ML and automation to offer enhanced customer experiences and higher business performance.
Security Remains Strong
Security (5.5% of revenues) climbed 21% to $707 million. Strong growth can be attributed to solid demand witnessed by web security, unified threat, network security and advanced threat solutions.
The company’s AI-driven Talos intelligence platform blocks billions of threats per day. The company is striving to leverage machine-learning to deploy security platforms in order to mitigate online risks on a real-time basis.
Other Products segment contains service provider video, cloud and system management and various emerging technology offerings. Revenues grew 3% to $3.24 billion.
Acquisition: A Key Catalyst
In the quarter under review, Cisco concluded the deal to buy Luxtera. Cisco intends to deploy Luxtera’s integrated optics technology capabilities across its robust network portfolio featuring capacities ranging from 100GbE (Gigabit Ethernet) to 400GbE. This will enable Cisco to provide ultra-high, data-heavy bandwidth services to CSPs and network service providers.
Further, the deal will help Cisco add more vital technology to its open-source software in order to build networking machinery.
The company had also announced that it has successfully closed the buyout of privately-held Duo Security. Further, the integration of Duo’s zero trust MFA technology with Cisco’s network and cloud security platforms is likely to enhance security features and mitigate phishing incidents on devices. This buyout will aid Cisco to deliver on its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.
Non-GAAP gross margin expanded 10 bps from the year-ago quarter to 64.1%. On a non-GAAP basis, product gross margin and service gross margin came in at 63.7% and 67.3%, compared with 63.7% and 67.1% reported in the year-ago quarter, respectively.
Non-GAAP operating expenses came in at $4.2 billion during the reported quarter, up 6% year over year. As a percentage of revenues, operating expenses contracted 10 bps to 32.4%.
Non-GAAP operating margin were up 20 bps year over year and came in at 32.2%.
Balance Sheet and Cash Flow
Cisco exited the third quarter with cash & cash equivalents and investments balance of almost $34.64 billion down from $40.38 billion in the prior-year quarter. Total debt (short plus long) came in at $23.69 billion compared with $25.63 billion reported in the previous quarter.
The company generated $4.3 billion cash flow from operations during the quarter under review.
In the third quarter, Cisco returned 7.5 billion shares to shareholders in form of share repurchase and dividend.
Furthermore, the company declared a quarterly dividend of 35 cents per share.
For fourth-quarter fiscal 2019, revenues are expected to grow 4.5-6.5% on a year-over-year basis.
Non-GAAP earnings are anticipated between 80 cents and 82 cents per share. The Zacks Consensus Estimate for earnings is pegged at 80 cents.
Non-GAAP gross margin is expected in the range of 64-65%, while operating margin is anticipated between 31% and 32% for the quarter.
Zacks Rank and Stocks to Consider
Cisco carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology sector are Cirrus Logic, Inc. CRUS, Universal Display Corporation OLED and Match Group, Inc. MTCH, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Cirrus Logic, Universal Display and Match Group have a long-term earnings growth rate of 15%, 30% and 15.15%, respectively.
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