After the bell on Wednesday, Cisco reported January quarter (fiscal second quarter) revenue of $12.45 billion and non-GAAP EPS of $0.73. Revenue was up 7% annually after backing out the late-October sale of Cisco's service provider video software business, and slightly topped a $12.42 billion consensus. EPS grew 16% and slightly beat a $0.72 consensus.
For the April quarter, Cisco is guiding for revenue to be up 4% to 6% after backing out the video software sale, and for EPS to be in a range of $0.76 to $0.78. That compares with a consensus for 3% official revenue growth and EPS of $0.76.
In addition, Cisco once more used its January quarter report to announce new capital returns. The quarterly dividend was hiked by $0.02 to $0.35 per share (that implies a 2.8% forward yield), and $15 billion was added to Cisco's stock buyback authorization, raising its available funds to $24 billion.
As of the time of this article, Cisco is up 4% in after-hours trading to $49.40, leaving shares close to a 52-week high of $49.47. Though Cisco's top-line growth remains moderate, a low valuation and better-than-expected product sales and orders (more on them shortly) are helping shares rally post-earnings. Cisco went into earnings trading for 14 times a fiscal 2020 (ends in July 2020) EPS consensus of $3.32.
Here are some notable takeaways from Cisco's report and call.
1. Order Growth Was Once More Solid
For the second quarter in a row, Cisco's product orders rose 8% annually, at least after adjusting for the video software sale. Enterprise orders, benefiting from a generally-healthy IT spending environment, rose 11%. Public sector orders rose an impressive 18%, commercial (SMB) orders rose 7% and service provider orders (pressured for a while by sluggish telecom capex trends and Cisco's relatively limited exposure to cloud giants) fell 1%.
Product orders also rose in all three of Cisco's geographic reporting segments, with EMEA (up 11%) the strongest of the bunch.
Cisco's product orders by geography and customer segment. Source: Cisco.
2. Hardware and Software Sales Were Better Than Expected
Cisco's total product (hardware and software) revenue rose 6% to $9.27 billion, topping a $9.15 billion consensus. That more than offset Cisco's lower-than-expected services revenue, which is heavily tied to maintenance and support revenue streams and rose just 1% to $3.17 billion.
Excluding the video software unit, product sales rose 9%. "Infrastructure Platforms" revenue, which covers most of Cisco's hardware sales, rose 6% to $7.13 billion, beating a $7.07 billion consensus. CFO Kelly Kramer noted on the call that switching revenue, which continues benefiting from a healthy sales ramp for Cisco's Catalyst 9000 campus switch line (it launched in mid-2017, and supports Cisco's innovative DNA software platform), rose by a double-digit percentage, as did wireless sales (predominantly Wi-Fi offerings). That offset routing and server declines.
Security revenue rose 18% to $658 million, beating a $629 million consensus. A strong IT security spending environment, Cisco's internal software investments and the company's recent $2.35 billion purchase of authentication software and services firm AppDynamics all seem to have helped.
Thanks to organic growth, a recent accounting change and the $1.9 billion acquisition of unified communications software firm BroadSoft (it closed in Feb. 2018), applications revenue rose 24% to $1.47 billion, beating a $1.35 billion consensus. Kramer mentioned that 65% of Cisco's software revenue came from subscriptions, up from 55% a year ago, and that the company now has over 31,000 deals for its comprehensive Cisco ONE software licensing packages.
3. Cisco Isn't Too Worried for Now About Macro Pressures
Though Cisco (like other U.S. multinationals) is seeing softness in some emerging market due to currency and/or macro pressures, the company's total emerging markets orders rose 6%, with orders from the BRIC economies and Mexico rising 2%. Chinese orders were roughly flat amid slowing economic growth and heightened trade tensions.
CEO Chuck Robbins admitted Cisco is dealing with "one of the more complex macro geopolitical environments" his firm has seen in a while. But he insisted the company "saw zero difference" in demand trends from the start of the January quarter to the end.
Robbins also insisted enterprises remain eager to make large IT investments. "[Enterprises] don't view this technology any more as an optional enabler of a strategy that they have come up with," he said. "They now view the technology as a core part of their strategy...Many of the things they're trying to do around simplification and cost reduction and productivity in their IT infrastructure, as well as being able to efficiently deal with this new multi-cloud world which is super complicated, I mean, they can't just stop."
4. Controlled Spending and Lower Memory Prices Are Lifting Earnings
As was the case in the October quarter, Cisco's non-GAAP operating expenses rose just 3% annually. And the company's non-GAAP gross margin (GM) came in at 64.1%, down from 65.1% a year ago -- Kramer says there was a 1-point impact from price erosion -- but slightly above the midpoint of Cisco's guidance range.
Notably, Cisco is guiding for an April quarter GM of 64% to 65%, up from 63.9% a year earlier. Lower DRAM prices have much to do with that outlook: After remaining a headwind in the January quarter, DRAM prices are expected to be a tailwind during the April and July quarters.
5. Cisco Is Still Buying Back a Lot of Stock
Also lifting EPS: Cisco spent $5 billion last quarter to repurchase 111 million shares at an average price of $45.09. That follows $6 billion worth of buybacks made at an average price of $42.83 during the October quarter.
With Cisco having just added $15 billion to its buyback authorization, and with the company both possessing over $13 billion in net cash (cash minus debt) and expected to produce over $15 billion in free cash flow over the next 12 months, the company should have little trouble continuing to make large buybacks, at least provided it doesn't splurge for a truly massive acquisition.