Cisco Systems (CSCO 43.58, -1.58, -3.50%) is trading lower today after reporting 3Q18 (Apr) earnings last night and providing guidance for 4Q18 (Jul).
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 software and subscription focus and away from hardware amidst weakening of its legacy server and router sales.
Businesses are becoming more 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 all of this is connected, it creates new revenue streams and operating models to drive efficiency and produce value.
To become digital businesses, customers require 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 rose 10% year/year to $0.66, at high end of prior guidance of $0.64-0.66. Revenue rose 4.4% year/year to $12.46 bln, around the mid-point of prior guidance of $12.30-12.54 bln. In terms of guidance for Q4 (Jul), Cisco sees non-GAAP EPS of $0.68-0.70 and revenue growth of +4-6% year/year, which we compute as $12.62-12.86. The EPS and revenue guidance is in-line with market expectations. Non-GAAP operating margin dipped a bit to 31.5% vs 32.3% in the prior year period as Cisco continues to be hurt by higher memory pricing. Cisco expects this to continue in the near term.
Drilling down a bit into the AprQ results, Cisco said on the call last night that it made steady progress in shifting more of its business towards software and subscriptions. This resulted in broad-based strength across products and geographies. In AprQ, Cisco generated 32% of total revenue from recurring offerings, an increase of 2 points year/year. Revenue from subscriptions was 55% of software revenue.
Infrastructure Platforms grew 2%, with strength in all businesses with the exception of routing. Switching returned to growth with revenue growth in both data center and campus. Campus growth was driven by Cisco's new switch, the Catalyst 9000. The company saw solid growth in wireless with strength in Meraki and its Wave 2 offerings. Data center had very strong double-digit growth, driven by servers as well as HyperFlex.
Routing declined largely with the continued weakness in service provider. Applications was up 19% in total, with broad strength across the businesses. Cisco saw very solid growth in TelePresence endpoints, UC infrastructure, and AppDynamics. Security was up 11% with strong performance in unified threat, advanced threat, and web security.
Looking at geographies, Americas grew 4%, EMEA was up 6%, and APJC was up 3%. Total emerging markets was up 7%, with the BRICs plus Mexico up 12%. In its customer segments, Enterprise was up 11%, Commercial grew 7%, Public Sector was up 2%, and Service Provider declined 4%.
In sum, the stock is down despite the AprQ results/guidance coming in pretty much as expected. The security business was a bit disappointing and the commentary about margins being impacted by higher memory pricing for the near future is not helping either. Overall, while Cisco made progress in its transition from hardware (routers, switches) to software and subscriptions (cloud, IoT, cybersecurity), the AprQ results/guidance/commentary tells us that it's going to take some time.
Older tech companies like Cisco and Oracle (ORCL), which came of age before the cloud/mobile boom, are struggling a bit to adapt to this new environment. Cisco has seen its stock price rise 40% since last August on excitement about a Cisco turnaround and transition. However, it's clear it's going to take some time for these large tech companies to fully achieve this.