Cisco Systems (CSCO) is trading modestly lower this morning after reporting 4Q17 (Jul) earnings last night and providing guidance for 1Q18 (Oct).
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.
Cisco sees the next wave of the Internet as the Internet of Everything (IoE), which Cisco defines as the connection of people, processes, data and things. The 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 Q4 (Jul) earnings report, non-GAAP EPS declined 3% YoY to $0.61, within prior guidance of $0.60-0.62. Revenue fell 4.0% year/year to $12.13 bln, which was at the high end of prior guidance of $11.88-12.13 bln. Non-GAAP operating margin came in at 31.5%.
In terms of forward guidance, Cisco sees 1Q18 (Oct) non-GAAP EPS coming in around $0.59-0.61, which is roughly in-line with market expectations. Revenue is expected to decline -1-3% on a YoY basis, which we calculate as $11.98-12.23 bln, which is also in-line with market expectations. Non-GAAP operating margin is expected to come in around 29.5-30.5%, a bit of a decline from JulQ at 31.5%.
Breaking down the revenue number a bit, product revenue was down 5% but service revenue was up 1%. About 31% of total revenue was from recurring offers, up 4 percentage points from 4Q16. Revenue by geographic segment was: Americas down 6%, EMEA down 6%, and APJC up 6%. Product revenue was led by Wireless and Security which increased 5% and 3%, respectively.
In sum, the JulQ results were pretty much as expected. It was good to see that recurring revenue ticking higher, that's from Cisco's efforts to Focus more on being more of an integrated supplier with more software/services and less reliance on hardware. However, investors appear to be underwhelmed by Cisco's in-line results and in-line OctQ guidance. 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.