Cisco Systems (CSCO) is trading down pretty sharply (-7%) today after reporting 3Q17 (Apr) earnings last night and providing guidance for 4Q17 (Jul). You're probably familiar with Cisco Systems, but just in case, some background would help. Cisco is a major supplier of networking equipment, including routers, servers, security devices, set-top boxes etc. In addition to its product offerings, Cisco provides a broad range of services, including technical support services and advanced services. Cisco customers include businesses of all sizes, public institutions, governments and communications service providers.
Over the last few years, Cisco has been transforming its business to move from selling individual products and services to selling products and services integrated into architectures. A big part of this transformation is Cisco transitioning its business to a more software and subscription focus and away from hardware as its legacy server and router sales have been weakening.
Globally, countries, cities, industries and businesses are becoming digital to capitalize on the next wave of the Internet: the Internet of Everything (IoE), which Cisco defines as the connection of people, processes, data and things. When people, processes, data and things are connected, it creates new revenue streams and operating models to drive efficiency and produce value.
Its customers' journey to becoming digital businesses requires security, cloud, mobile, social and analytic technologies with a strong foundation of an intelligent network. The move to digital is driving many customers to adopt entirely new IT architectures and organization structures. Also, Cisco is focusing on a market transition involving the move toward more programmable, flexible, and virtual networks, sometimes called software defined networking (SDN) and network function virtualization (NFV). This transition is focused on moving from a hardware-centric approach for networking to a virtualized network environment.
Turning to the Q3 (Apr) earnings report, non-GAAP EPS grew 5% YoY to $0.60, above prior guidance of $0.57-0.59. Revenue fell 0.5% year/year to $11.94 bln, which was within prior guidance of $11.76-12.00 bln. Non-GAAP operating margin came in at 32.3%. In terms of forward guidance, Cisco sees 4Q17 (Jul) non-GAAP EPS coming in around $0.60-0.62, which is roughly in-line with market expectations, but a bit on the weaker side. Revenue is expected to decline -4-6% on a YoY basis, which we calculate as $11.88-12.13 bln, which is a good bit below market expectations.
On the call, Cisco talked about how it's transforming its business and innovation is an important part of that with analytics, in particular, being a key element of this innovation. This quarter, Cisco completed the acquisition of AppDynamics, enabling it to provide customers with unprecedented visibility across networking, data center, security, and applications. Cisco is in the early stages of scaling out the AppDynamics platform through the Cisco sales force and partner ecosystem.
Cisco also discussed last week's WannaCry ransomware attack, which was another example of the devastating impact cybercrime can inflict. Cisco's cyber threat intelligence team has been working around the clock to dissect the ransomware and keep customers protected. Its security business delivered another solid quarter with 9% revenue growth. Its next-generation firewall portfolio grew 49% with 6,000 new customers in AprQ, bringing its total to 73,000+.
Turning to its collaboration business, in January, the company introduced Cisco Spark Board, the first all-in-one cloud-based collaboration and meeting room platform. Cisco is seeing good early traction with nearly 700 customers adopting the platform. Its pending acquisition of MindMeld will help simplify and enhance the collaboration experience even further through the power of artificial intelligence and machine learning. For example, users will be able to interact with Cisco Spark via natural language commands, providing an experience that is highly customized to the user and their work.
In sum, the AprQ results were pretty good. However, the JulQ guidance is being seen as a disappointment. Keep in mind that Cisco tends to be pretty conservative with guidance but investors seem to have been hoping for a bit more. The JulQ revenue guidance of down 4-6% is being seen as pretty severe and it makes you wonder if OctQ revenue may take a hit as well. With that said, Cisco is undergoing some major changes so it's not entirely surprising to see some ups-and-downs in terms of earnings.