Cisco Systems (CSCO 45.55, +1.22, +2.75%) is trading higher today (+4%) after reporting
1Q19 (Oct) earnings last night and providing guidance for 2Q19 (Jan). This was
a good quarter for Cisco overall.
Cisco is a major supplier of networking equipment, including routers, servers, security devices, set-top boxes etc. 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.
In the Q1 (Oct) earnings report, non-GAAP EPS rose 23% yr/yr to $0.75, above prior guidance of $0.70-0.72. Revenue rose 7.7% yr/yr to $13.07 bln, which also was above prior guidance of $12.74-12.99 bln. Non-GAAP operating margin increased a bit to 31.9% vs 30.4% in the prior year period. In terms of guidance for Q2 (Jan), Cisco sees non-GAAP EPS of $0.71-0.73 and revenue growth of +5-7% yr/yr, which we compute as $12.24-12.47 bln. The EPS and revenue guidance is in-line with market expectations.
Cisco said on the call last night that it saw “broad-based growth across all geographies, product categories and customer segments.” The Enterprise has expanded to now include multiple clouds, and applications are evolving at an unprecedented rate. As they face a new level of complexity, customers are increasingly seeing the value of Cisco's integrated platforms over standalone products.
In terms of key new products, in its Infrastructure Platforms segment, Cisco announced several new additions. It launched the next editions to the Catalyst 9000 family, the Catalyst 9200 and the Catalyst 9800. In its data center segment, Cisco recently unveiled new Nexus 400GB switches. The company says it's committed to leading the market transition from 100GB to 400GB, providing customers with increased bandwidth and scale.
During the Q&A, there seemed to be concerns from analysts that perhaps customers had pulled in orders into OctQ to avoid potentially larger tariffs later. The implication being that perhaps JanQ might suffer from those pull-forward sales into OctQ. There may be a few sales impacted but it was not broad-based. Also, Cisco said the tariffs were immaterial in the quarter, they did not see any impact. Not only that, Cisco's recent price increases resulted in absolutely no change in demand. So that was good to hear.
Another interesting tidbit was when Cisco was asked about its product revenue growth guidance being conservative. Cisco said the last two quarters were probably the most consistent strong quarters that Cisco has seen in years. It's a combination of the macro environment and Cisco's innovation. The company has been launching several technology innovations over the past few months.
In sum, this was a nice quarter for Cisco. One of the knocks on Cisco is that it has been seen as an older tech company, which came of age before the cloud/mobile boom. There have been concerns that Cisco has been struggling a bit to adapt to this new environment. However, there has been some noticeable improvement in recent quarters. It's still going to take time, but Cisco has made progress in its transition from hardware (routers, switches) to software and subscriptions (cloud, IoT, cybersecurity).
On a final note, the stock has been in a pretty narrow trading range of $42-48 since mid-February. But to its credit, Cisco did not sell off as much as other tech names in the tech meltdown in October. That's probably an indication that investors do not view Cisco as overpriced and it's an indication that investors seem some value here as Cisco has been making progress as it adapts to the cloud/mobile world.
- OUR VIEW
- LEARNING CENTER