Cisco Systems Inc. Earnings: The 3 Things That Really Matter
For Cisco (NASDAQ: CSCO) fans, fiscal 2018's first-quarter earnings results were a long time coming. Not all tech watchers were impressed, but considering Cisco stock is up 7% since the announcement, it's safe to say the report generated more smiles than frowns.
Much of the news focused on Cisco's earnings per share, which (excluding one-time items) came in at $0.61, versus the consensus estimate of $0.60. Though the EPS beat was a pleasant surprise, there are three things that really matter for long-term growth and income investors.
Lean and mean
The first order of business for CEO Chuck Robbins when he took the helm back in 2015 was to transition Cisco from a dependence on its legacy routers and switches business and toward a focus on cloud Infrastructure-as-a-Service (IaaS) and related software subscriptions. As demonstrated again last quarter, that change is well underway.
Another objective, beyond the sometimes-painful shift in business focus, was to make the company more efficient. Some investors may have overlooked it, but Cisco was able to pare overhead and still meet revenue expectations of $12.1 billion, a slight 2% decline compared to last year.
In the fourth quarter of fiscal 2017, operating expenses were down 3%, on the heels of an 8% reduction the previous quarter. Fast-forward to Cisco's most recent earnings report, and it kept that momentum going, achieving a 7% drop in expenses.
As a result, despite the decline in total revenue, Cisco's EPS including all expenses rose 4% to $0.48 a share. Its pattern of maintaining its solid (though not spectacular) top line while cutting costs each quarter is already paying dividends -- and will continue to long into the future.
Winning where it matters
In addition to increased efficiency, Robbins also has focused on cloud software subscription sales to build a foundation of recurring revenue. Though implementing such a significant shift can be a painfully slow process, at Cisco, it is picking up steam.
Of the company's $12.1 billion in sales, 32% or $3.87 billion, was derived from software subscriptions. Better still, the percentage of income from recurring revenue sources continues to climb: Last quarter's 32% was three percentage points higher than a year ago. That may not sound like much, but boosting Cisco's base of stable revenue 10% in a year is nothing to sneeze at. And it gets better.
Deferred revenue soared 10% to $18.6 billion as Cisco kicked off its fiscal year, a good sign the sales pipeline is sound. Deferred product revenue was up 16%, led by subscription-based and software offers. Software subscriptions jumped 37% compared to a year ago. Clearly, growth the all-important recurring revenue category is poised to continue.
Expanding its cloud IaaS and data analytics product suites does put Cisco in the cross-hairs of some heavy hitters, including Microsoft (NASDAQ: MSFT) and IBM, among others. Microsoft's $20.4 billion annual cloud revenue run-rate didn't swell so fast, nor so large, by hosting data. Cloud software and analytics -- including artificial intelligence, which is another Cisco focus -- is where Microsoft's outstanding results are derived from.
Look out world, here we come
The positive signs have been there for some time: Cisco's steady recurring revenue growth, cutting overhead, and additions to its product suite via acquisition. It closed two deals last quarter. One was for Springpath, to bolster its data center software offerings. The other privately held firm was Perspica, which Cisco acquired for its AI-driven data analytics prowess.
The $1.9 billion purchase of cloud collaboration software provider BroadSoft is another deal that falls right in line with Cisco's plans: And the future looks awfully good. Cisco's guidance for the current quarter is for revenue growth of 1% to 3%.
Assuming Cisco delivers on its forecast, it will serve as confirmation that the company is rounding the corner in its ambitious transformation effort. Toss in the relative value the company offers compared to its peers, its sound 3.15% dividend yield, and the headway it's making in the three key areas discussed above, and it becomes obvious that it's time to get on board the Cisco train.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Tim Brugger has no position in any of the stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.