Cisco Shares Jump on Return to Sales Growth

“We are seeing the benefits of the strategy we started executing on 10 quarters ago,” CFO Kelly Kramer says.
Matthew HellerFebruary 15, 2018

Cisco returned to revenue growth after a two-year hiatus, signalling it may have turned a corner in its difficult transition from a hardware to a software-focused business model.

The networking giant’s shares jumped 6.7% to $44.93 in after-hours trading Wednesday — levels not seen since the boom went bust — as investors reacted positively to a second-quarter earnings report that showed revenue rose 3% to $11.89 billion.

Cisco’s first quarter of growth since 2016 topped analysts’ estimates of revenue of $11.81 billion. Earnings were also better than expected at 63 cents per share, against estimates of 59 cents per share.

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“We had a great quarter which demonstrates that our strategy is working. Our business is growing, we have a fantastic innovation pipeline, our balance sheet is strong and we have a team that’s executing incredibly well,” CEO Chuck Robbins said in a news release.

Cisco has been transforming itself into a software-focused company amid sluggish demand for its traditional switches and routers business from telecom carriers. The subscriptions for products such as software-centric switches generate recurring revenue but can have a negative effect in the short term.

“Less of the sale is recognized up front with the rest deferred to later quarters,” MarketWatch noted.

In the second quarter, though, Cisco’s recurring revenue climbed 36% year-over-year, reaching 33% of total revenue, both services and product. At the beginning of fiscal 2015, recurring revenue was about 6% of total revenue, CFO Kelly Kramer said.

Cisco’s core infrastructure platforms segment, which includes switches for data centers, saw 2% revenue growth to $6.69 billion, while applications revenue rose 6% to $1.18 billion.

“I‘m most impressed at the growth in software subscriptions as Cisco five years ago was primarily about hardware,” Patrick Moorhead, principal analyst at Moor Insights and Strategy, told Reuters.

Cisco now expects third-quarter adjusted earnings of 64 to 66 cents per share, excluding certain items, on revenue growth of 3% to 5%. “We are seeing the benefits of the strategy we started executing on 10 quarters ago,” Kramer said.

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