All things considered, Cisco Systems' (CSCO) latest earnings report calmed recent worries about macro issues, and gave fresh signs that enterprise demand for its hardware and software remains strong.
After the bell on Wednesday, the networking giant reported October quarter (fiscal first quarter) revenue of $13.07 billion (up 8% annually) and non-GAAP EPS of $0.75 (up 23%), topping consensus analyst estimates of $12.86 billion and $0.72. Revenue growth improved from the July quarter's 6%, and benefited from a 9% increase in product (hardware and software) sales to $9.89 billion.
Cisco also guided for 5% to 7% January quarter revenue growth, normalized for the recent sale of Cisco's service provider video software business, and EPS of $0.71 to $0.73. That compares with a consensus for 5% total revenue growth and EPS of $0.72.
In spite of the sales/EPS beat, Cisco's shares were nearly flat in after-hours trading going into its earnings call. However, they jumped after Cisco disclosed on the call that its product orders rose 8% annually last quarter. That's slightly above the 7% growth seen in the July quarter, and the strongest figure recorded in recent quarters.
Cisco is up over 5% in Thursday trading as of the time of this article amid a 1.9% gain for the Nasdaq, and is now up 21% on the year. Switching rival Arista Networks (ANET) is also up over 5%, as is Broadcom (AVGO) , which supplies Ethernet switching chips to both companies.
Here are some notable takeaways from Cisco's earnings report and call.
1. Enterprise Orders Were Very Strong
After having risen 11% annually during both the April and July quarter, Cisco's enterprise product orders grew 15% in the October quarter. As Jeff Marks, lead analyst for Jim Cramer's Action Alerts Plus portfolio, which owns Cisco, observes, a strong ramp for Cisco's Catalyst 9000 campus (office) switch line -- it launched in mid-2017, supports advanced network automation software and saw additional hardware launches this week -- is boosting enterprise order growth and could allow it to remain strong in the near-term.
Cisco also reports seeing strong demand for its Nexus 9000 data center switch line, its Wave 2 and Meraki Wi-Fi hardware/software lines and its UCS and HyperFlex server/storage lines. Cloud infrastructure adoption and stiff competition are still likely to be headwinds for Cisco's enterprise hardware sales over the long run. However, with the help of product refreshes and major software investments, things look pretty good for now.
2. Software Outperformed, But an Accounting Change Helped
Contributing to Cisco's revenue beat: Its "Applications" revenue rose 18% to $1.42 billion, topping a $1.34 billion consensus. Cisco also reported that subscriptions now account for 57% of software revenue, up from 52% a year ago.
CFO Kelly Kramer noted on the call that the adoption of ASC 606 accounting rules boosted Applications revenue, by resulting in Cisco recording more software revenue up-front rather than putting it on the company's deferred revenue balance. As a result, while Applications revenue rose 18%, Cisco's product deferred revenue balance fell 29%.
3. Emerging Markets Orders Were Better Than Expected
Cisco's emerging markets product orders rose 16%. That's up from the July quarter's 12% and certainly better than feared given the recent macro concerns that various U.S. multinationals have aired about emerging markets demand.
In the BRIC countries and Mexico, product orders collectively rose 19%, after having risen 22% in the August quarter. CEO Chuck Robbins added that Indian orders were up over 50% for the second quarter in a row.
4. Cisco Isn't Seeing a Major Impact from Tariffs for Now
When asked about the impact of the 10% tariffs that were imposed in September on many Chinese imports, Robbins indicated Cisco has passed on the cost of the tariffs to customers without much trouble.
"I can tell you that from a demand perspective, when we implemented the pricing changes, which we told you we would on the last call, we saw absolutely no demand change from the week before and the week after we did that," he said. In addition, Robbins insisted Cisco hasn't seen many customers pull forward orders in an attempt to avoid tariffs.
5. Buybacks Remain Aggressive
Boosting October quarter EPS: Cisco spent $5 billion to repurchase 109 million shares. That follows $6 billion worth of buybacks in both the April and July quarters.
Cisco had $14 billion left on its buyback authorization at the end of its October quarter. With the company possessing about $17 billion in net cash (cash minus debt) at quarter's end and expected to generate over $15 billion in free cash flow (FCF) this year, look for buybacks to continue at a brisk pace for a while.