Cisco (CSCO) - Get Cisco Systems, Inc. Report provided a bright spot in a dull earnings season for IT companies, reporting fiscal third-quarter results that topped Wall Street forecasts after the market close on Wednesday. Companies ranging from large IT heavyweights such as EMC (EMC) and IBM (IBM) - Get International Business Machines Corporation Report to gear and networking companies such as Ericsson (ERIC) - Get Telefonaktiebolaget LM Ericsson Report and Juniper Networks (JNPR) - Get Juniper Networks, Inc. Report posted disappointing numbers during the latest quarter.
Cisco earned 57 cents per share on $12 billion in revenue during the quarter. Analysts that FactSet surveyed expected 55 cents in earnings per share and $11.97 billion in sales.
"We continue to execute well in an obviously very tough environment," CEO Chuck Robbins told investors during an earnings call after the market close on Wednesday.
Shares were up 87 cents, or 3%, midday Thursday at $27.61 per share.
"The company delivered convincing fiscal third-quarter results which defied disappointing results from its data-networking peers, a difficult macro backdrop and weak demand for IT infrastructure," said Jim Cramer, TheStreet's founder and manager of the Action Alerts PLUS portfolio, which owns CSCO.
Edward Jones tech analyst Dave Heger observed there was bad news mixed in with the good for Cisco.
While the company's revenue in its video and security segments increased 18% and 17%, respectively, year over year, sales at its core businesses such as switching and Cisco's next-generation routing dropped 3% and 5%, respectively.
"Cisco continues to be in a transition moving towards software and subscription services. We did see progress on that front," Heger said. "You still have these much bigger revenue lines like switching and routing. You can't afford to see too much of a decline in those."
Security will continue to be a hot spot for Cisco, which paid $2.7 billion for Sourcefire in October 2013 and has made further investments in the area. Robbins left the door open for more deals, saying the company will "continue investing both organically and any other way" during the call.
"Cisco is known for routing and for switching, but that's actual core infrastructure and that's not growing as much as he'd [Cisco CEO Chuck Robbins] like," Cramer said. "So they've been focusing on security which is really growing. They're focused on these giant website companies and they've really been able to take a lot of that business away - hundreds of millions of dollars in recurring revenue."
Cisco closed five acquisitions during the quarter. The deals included the $1.4 billion purchase of Internet of Things tech company Jasper Technologies; the $700 million purchase of video conferencing and communications tech company Acano; private search firm Synata; the $320 million purchase of chipmaker Leaba; and the $260 million acquisition of application management company CliQr.
Cisco has used M&A to advance its shift from a hardware company to more of a software outfit.
The company will continue to look for targets, Robbins said, with qualifications. "I probably wouldn't expect [M&A] to be quite as fast-paced as it has been, but we will continue to be opportunistic," he told investors.
In the fourth quarter, Cisco expects revenue to grow by 3% or less. The company forecasts earnings per share of 59 cents to 61 cents.
"While we are optimistic and we are pleased with our execution, we still are operating in a relatively uncertain environment," Robbins said.
For starters, he noted, the Federal Reserve signaled Wednesday that it could raise interest rates in June. The U.K.'s referendum on Brexit, or whether to exit the European Union, looms in June. Brazil faces political turmoil, and then there are elections ahead in the U.S.
"There is still a relatively broad set of unknown issues out there," he said.
While Cisco's report was a bright spot among IT companies, there is room for improvement.
"One thing I would like to see is a little more stability in the core business, on the switching and routing product lines," Heger said. "Some of them may benefit if enterprises feel a little more confident as the year goes on."