Cisco Systems (CSCO) is trading up nicely (+7%) today to a new 15-year high. after reporting 1Q18 (Oct) earnings last night and providing guidance for 2Q18 (Jan). 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.
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 people, processes, data and things are 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 Q1 (Oct) earnings report, non-GAAP EPS was flat YoY at $0.61, at the high end of prior guidance of $0.59-0.61. Revenue fell 1.7% year/year to $12.14 bln, which was within prior guidance of $11.98-12.23 bln. Non-GAAP operating margin came in at 30.4%. In terms of forward guidance, Cisco sees 2Q18 (Jan) non-GAAP EPS coming in around $0.58-0.60, which is a bit better than market expectations. Revenue is expected to grow 1-3% on a YoY basis, which we calculate as $11.70-11.93 bln, which is also above market expectations.
On the call, the company said it saw a good performance in its next-generation data center switching platforms as customers continue to shift to 10G, 40G and 100G architectures and embrace multi-cloud adoption. Going forward, Cisco sees a tremendous opportunity to benefit from a shift in customer demand from stand-alone products to integrated platforms with its intent-based infrastructure portfolio providing unmatched benefits.
Turning to its Applications business, Cisco says that companies require a highly-secure network that closely monitors applications and workload performance across a complex multi-cloud environment. Cisco's acquisition of AppDynamics is core to its capability of providing end-to-end analytics, from the network to the data center to the application. Cisco is also enabling new capabilities based on advanced AI and machine learning across the portfolio. An example of this is our acquisition of Perspica, providing deep machine learning driven analytics.
Moving to its Security business, with an expanding threat landscape, cybersecurity is the number one priority for businesses and is at the heart of every company's digital strategy. In a multi-cloud world, as its customers' environments become increasingly distributed, security requirements only increase. This segment saw 8% revenue growth.
In sum, the OctQ results were quite good. Routing and switching saw a decline in revenue, but its Security business was robust in the quarter. It's worth noting that Cisco tends to be pretty conservative with its guidance, so for them to be so bullish about JanQ, that's somewhat unusual and it's a signal that management feels pretty good about its near term prospects.