Networking giant Cisco Systems (NASDAQ: CSCO) managed to beat revenue and earnings estimates when it reported its fiscal first-quarter results on Nov. 16, but the stock sank regardless. Cisco's core switching business was weak, some of its most important growth businesses didn't grow at all, and its guidance for the second quarter left a lot to be desired. Here are 10 key metrics from Cisco's earnings report that sum up the company's results.
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Image source: Cisco Systems.
1%: Cisco's total revenue declined by 2.6% year over year during the first quarter, but this number doesn't take into account an important divestiture. Cisco sold its set-top box business in 2015, with the transaction closing in late November. Excluding revenue from that business, Cisco's total revenue increased by 1% during the first quarter.
1,326: Cisco announced a significant restructuring effort in August, with the aim of cutting costs in low-growth areas and shifting resources into the company's major growth initiatives. Cisco planned to eliminate 5,500 positions beginning in the first quarter, about 7% of its global workforce, with essentially all of the cost savings slated for reinvestment. Cisco's headcount dropped by 1,326 during the first quarter as part of this restructuring plan, with layoffs being partially offset by new hires in growth businesses.
-7%: Switching is Cisco's largest business, responsible for 30% of total revenue during the first quarter. It was also the weakest segment for Cisco, posting a 7% year-over-year revenue decline. Cisco's switching business depends on its customers' willingness to invest in their infrastructure, which in turn depends on the general economic outlook. When economic uncertainty rears its ugly head, Cisco's customers tend to slow down. CFO Kelly Kramer pointed to campus switching as the major driver of the company's weak results:
I'd say for campus switching, which is 2/3, roughly, of our entire switching business, which is our biggest business unit, I'd say most of that is macro, right? It is the one area, and I think we've talked about before. It's the one area that people can put off doing a refresh if there are any macro concerns. That's what we typically see any time you see any economic pause or macro event.
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11%: One of the areas where Cisco is investing the cost savings from its restructuring is security. The security business generated $540 million of revenue during the first quarter -- up 11% year over year -- making it the fastest-growing segment for the company. Acquisitions are driving some of this growth, with Cisco aiming to offer integrated solutions that stand out in a fragmented security industry.
48%: Security is one area of Cisco's business that's shifting toward software -- particularly subscription software. This shift is spreading out revenue that would have previously been recognized upfront, hurting Cisco's headline numbers in the short run. Kramer estimates that this transition reduced Cisco's revenue by as much as two percentage points during the first quarter.
Deferred revenue, which is revenue that has not yet been recognized, is one way to measure the progress of Cisco's subscription businesses. Total deferred revenue grew by 12% year over year in the first quarter to $17 billion, with the portion of product deferred revenue related to recurring and subscription businesses surging 48%.
-3%: The data center segment, which includes Cisco's UCS servers, suffered a 3% year-over-year revenue decline during the first quarter. Data center was growing at a double-digit pace not too long ago, making this result particularly disappointing. Cisco pointed to a market shift from blade to rack servers as well as general macro-economic uncertainty as the main drivers behind the decline.
$3.1 billion: Despite a weak quarter in many of Cisco's key segments, the company remained wildly profitable. Non-GAAP net income was $3.1 billion, with a gross margin of 65.2% and an operating margin of 31.6%.
-2% to -4%: One reason shares of Cisco fell following the company's earnings report was weak guidance. Excluding the divested set-top business, Cisco expects second-quarter revenue to decline by between 2% and 4%. The company isn't modeling any improvement in capital expenditures from its service provider customers, although CEO Chuck Robbins is hopeful that some headwinds will turn into tailwinds once President-elect Trump takes office.
$36.2 billion: Cisco is one of many large companies currently hoarding billions of dollars overseas, with $36.2 billion of net cash on its balance sheet. As it stands today, profits from international operations can't be brought into the U.S. without that cash being taxed at 35%. With President-elect Trump promising to enact a repatriation tax holiday, reducing that rate to 10%, Cisco's mountain of overseas cash could finally be put to use. The company is considering increased share buybacks, a higher dividend payment, debt reduction, acquisitions, and strategic investments as options if it's able to repatriate its overseas cash.
$14.4 billion: Even without using its overseas cash, Cisco has been able to buy back a tremendous number of shares, in part by taking on debt. The company spent $1 billion on share buybacks during the first quarter, and it's spent a total of $97.6 billion since it began its share buyback program. $14.4 billion remains authorized for further share buybacks, although this number could rise if a repatriation holiday becomes a reality.
Cisco's first-quarter results may have beaten expectations, but its core switching business is suffering from weak demand, and its data center business has stopped growing altogether. The shift to subscription software and macro-economic uncertainty are teaming up to cause all sorts of problems for the company -- at least as far as the headline numbers are concerned. Investors will need to wait and see if the situation begins to improve in 2017.
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