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Networking giant Cisco Systems reported its fiscal first-quarter results after the market closed on Nov. 12. The numbers were solid, with Cisco beating analyst estimates for both revenue and earnings, while growth was driven by the core switching business, as well as faster-growing segments. However, a weak outlook for the second quarter, resulting from a slowdown in orders, overshadowed Cisco's results.
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Cisco reported quarterly revenue of $12.7 billion, up 3.6% year over year and $30 million higher than analysts were expecting. Non-GAAP EPS jumped to $0.59, up 9.3% year over year and $0.03 better than the average analyst estimate. On a GAAP basis, Cisco reported earnings of $0.48 per share, up 37.1% year over year.
A look at Cisco's resultsDuring Cisco's fourth quarter, the Americas region was a standout, with product orders coming in essentially flat in both the Europe, Middle East, and Africa (EMEA) and the Asia-Pacific, Japan, and China (APJC) regions. This situation reversed itself during the first quarter. Orders from the Americas were up just 1% year over year, while the EMEA and APJC regions posted 3% and 9% order growth, respectively. In total, Cisco's product orders rose 3% year over year.
Cisco's switching business, by far its largest segment, reported 5% year-over-year revenue growth during the quarter, generating $4.02 billion of revenue. The routing business was a different story, posting an 8% year-over-year revenue decline. The company blamed the timing of certain large deals for the decline, stating that it expects the business to return to growth going forward.
A couple of Cisco's smaller segments posted double-digit revenue growth during the quarter, helping to make up for the weak routing results. The collaboration segment, which includes products and services related to video conferencing, grew by 17% year over year, generating $1.1 billion of revenue. The data-center segment also grew fast, posting 24% year-over-year growth, driven by the continued success of Cisco UCS servers.
One of Cisco's major growth businesses is security, and while the segment grew revenue by just 7% year over year during the quarter to $485 million, progress is being made. Deferred revenue related to security grew 31% during the quarter, reflecting the fact that Cisco's security portfolio is shifting toward software and cloud-based products and services. The company stated in its conference call that it expects security revenue to grow by a mid-to-high-teens percentage in the second half of the year, a significant acceleration.
Cisco's GAAP operating expenses declined by about 5% year over year, reflecting a decline in R&D, SG&A, and restructuring expenses. Cisco's headcount is down slightly year over year, and this drop in costs combined with higher revenue drove earnings growth during the quarter. Operating cash flow jumped 11% year over year to $2.8 billion.
A look at Cisco's guidanceWhile Cisco's first-quarter results were solid, the company's guidance disappointed investors. Revenue is expected to move within a range of staying flat to rising 2% year over year, while non-GAAP EPS is expected to be between $0.53 and $0.55. Analysts were expecting revenue growth of 5.1% and EPS of $0.56.
Cisco CEO Chuck Robbins pointed to a few headwinds that will negatively affect its second quarter:
Key takeawaysCisco, like many other global technology companies, is suffering from a strong U.S. dollar. Cisco doesn't provide its results on a constant-currency basis, but the fact that the company is still growing Internationally despite this headwind means growth in local currencies is probably even stronger.
Overall, Cisco's business is performing well. The core switching business is growing, smaller segments such as the data center are growing fast, and the company is keeping a lid on costs. Guidance for the second quarter is disappointing, but I think it's more of a bump in the road than an indication that anything is wrong with Cisco's business.
The stock declined following the earnings report, but investors should remember that shares of Cisco are extremely inexpensive, and the company doesn't need to post incredible growth to provide solid returns for investors in the long run. After backing out the net cash on the balance sheet, Cisco trades for about 11 times last year's GAAP earnings. For a company as dominant as Cisco, this makes little sense, and investors can take advantage of the post-earnings drop and buy shares at a great price.
The article What Investors Need to Know About Cisco Systems' Earnings originally appeared on Fool.com.
Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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