Wall St. Celebrates Cisco's Return to Growth

Cisco Hq2

By: R. Scott Raynovich

Wall St. analysts are scrambling to up their earnings estimates for Cisco today after the networking giant beat earnings estimates, raised revenue and earnings guidance, and detailed its progress in moving toward a focus on cloud and software sales.

Cisco shares were up $2.04 (+5.98%) $36.15 in mid-day trading. The company said it expects one percent to three percent year-over-year revenue growth next quarter, the first sign of growth after eight consecutive quarters of declines. It reported per-share earnings of $0.61, compared to analyst estimates of $0.60 per share. Net income was $2.4 billion, up 3% from the same quarter last year.

According to FactSect research and CNBC.com, a dozen Wall St. analysts raised earnings estimates for the company today.

New Revenue Groups

This was the first quarter for which Cisco reported it's new financial organization reporting five revenue groups -- Infrastructure, Applications, Security, Services, and Other. While infrastructure, mostly hardware targeted at enterprises and service providers, is still shrinking, other areas saw promising growth.

Infrastructure reported $6.97 billion in revenues, down 4% from the same quarter last year. Revenue in Applications, a software segement that includes the acquisition of AppDynamics, was up 6% to $1.203 billion. Security grew 8% to $585 million. Services nudged up 1% to $3.082 billion.

Wall St. Loves the Quarter

Analysts embraced the return to growth as well as progress in the transition to software and subscription sales, as measured by deferred revenue.

"We were pleased and relieved that Cisco guided to y/y growth returning in its outlook; we see this as sustainable," wrote Raymond James analyst Simon Leopold in a note to investors. "Cisco last reported y/y growth in October 2015. As proof of the value of the pivot, Cisco had 12% of product revenue drawn from deferred revenue on the balance sheet, which is roughly double the contribution two years ago."

Jefferies analyst George Notter says he still likes the stock. "This was a breakout quarter for Cisco," wrote Notter. "The print, guidance, and the narrative around the business were significantly better than many investors expected. Impressively, they’re now guiding for top line growth in January. We continue to like the risk/reward in the name."

The only dim spot for Cisco was a slight downtick in gross margins (GMs), as pointed out by analyst Michael Genovese of MKM partners. This could suppress earnings gains, even if revenue grows, said Genovese: "We are increasing our FY18 revenue forecast by nearly $200mn, and our FY19 forecast by more than $300mn. However, our EPS estimates are not changing much because of the GMs. 1QFY18 GMs came in 63.7% or down 150bps y/y."