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Cisco Jumps on an Earnings Beat and Better-Than-Expected Guidance: 6 Takeaways – RealMoney

Unlike a lot of tech companies reporting in recent weeks, Cisco Systems (CSCO) went into earnings facing a pretty low bar. And it cleared that bar comfortably.

On Thursday afternoon, Cisco reported October quarter (fiscal first quarter) revenue of $11.93 billion (down 9% annually) and non-GAAP EPS of $0.76 (down 10%), topping FactSet consensus estimates of $11.85 billion and $0.70.

The networking giant also guided for January quarter revenue to be flat to down 2% annually, and for non-GAAP EPS to be in a range of $0.74 to $0.76. That respectively compares with consensus estimates for a 3.4% revenue drop and EPS of $0.73.

Separately, Cisco announced that it has hired Autodesk (ADSK) CFO R. Scott Herren to be its CFO, effective Dec. 18. The news comes three months after Cisco disclosed that CFO Kelly Kramer would be retiring once a successor is in place.

As of the time of this article, Cisco’s stock is up 7.5% after hours to $41.55. Shares had gone into earnings down 19% on the year, as markets digested the major top-line pressures facing various Cisco enterprise hardware businesses.

Here are some key takeaways from Cisco’s earnings report and call.

1. Chuck Robbins Suggested Demand Trends Are Improving Some

“We are encouraged by the signs of improvement in our business as we continue to navigate the pandemic and other uncertainties,” said Cisco’s CEO on the call.

Robbins also noted demand among “commercial” (SMB and midmarket) clients picked up following a rough July quarter, and that Cisco is now seeing more large enterprise deals in its pipeline. He added Cisco’s sales to public sector clients are benefiting from various stimulus efforts around the world, as well as from growing sales to education and U.S. federal clients.

2. Product Orders Were Still Pretty Mixed

Cisco’s total product orders fell 5% annually, after dropping 10% in the July quarter.

Enterprise orders were a clear soft spot, with their annual decline increasing to 15% from the July quarter’s 7%. On the other hand, Cisco’s commercial product order decline narrowed to 8% from 23%, and public sector orders went from being down 1% to up 5%. Service provider orders were down 5% for the second straight quarter.

Cisco’s October quarter product orders. Source: Cisco.

Robbins got multiple questions on the call about enterprise orders. He insisted he’s not too concerned about them, while mentioning that Cisco now has more large enterprise deals in its sales funnel and predicting that videoconferencing-related investments that will be made as employees start returning to offices will give enterprise sales a lift.

3. Hardware Sales Fell Sharply Again

Cisco’s Infrastructure Platforms segment — among other things, it covers sales of switches, routers, servers, Wi-Fi gear and related software — posted revenue of $6.34 billion, below a $6.45 billion consensus. With both COVID and competitive pressures weighing, the segment’s revenue was down 16% annually for the second quarter in a row.

Kramer said Cisco saw revenue declines across its switching, routing, data center (server/storage) and wireless product lines. The Catalyst 9000 campus switch line and Wi-Fi gear supporting the newer Wi-Fi 6 standard were said to be strong points.

4. Software and Security Weren’t Perfect, But Had Some Bright Spots

Cisco’s Applications segment revenue came in at $1.38 billion, down 8% annually and slightly below a $1.4 billion consensus. However, Kramer indicated the decline had to do with lower sales of unified communications and telepresence endpoint devices (IP phones, in-office videoconferencing gear, etc.).

Though it’s no Zoom (ZM) , the Webex videoconferencing business was said to have seen strong revenue and usage growth, with monthly participants having nearly doubled since March to almost 600 million. And with 78% of Cisco’s software revenue now coming from subscriptions (up from 71% a year ago), the company’s deferred product revenue rose 15%.

Security revenue rose 6% to $861 million, topping consensus by $5 million. “Strong double-digit growth” was reported for Cisco’s cloud security offerings, which include its Duo authentication platform and its cloud-based Umbrella Internet gateway. From the looks of things, Cisco’s large, on-premise, security appliance business had a rougher time.

5. Some Stock Was Repurchased

Cisco bought back some stock, but not at the heady rates seen in some recent years.

$800 million was spent to repurchase about 20 million shares last quarter at an average price of $40.44. For comparison, $1.5 billion was used to return cash to shareholders via Cisco’s quarterly dividend.

6. Cisco Appears to be Making Some Progress with Internet/Cloud Giants

“We are making great strides with our webscale customers, with our fourth consecutive quarter of strong double-digit growth,” said Robbins. He later indicated that demand from Internet/cloud giants (i.e., hyperscalers) gave a meaningful boost to Cisco’s service provider product orders during the quarter.

Robbins’ comments come a year after Cisco announced a major strategy change for its efforts to win over hyperscalers, stating it would sell switching/routing processors, optics and its IOS XR 7 router OS on a standalone basis to the third-party hardware makers the hyperscalers work with. With the hyperscalers historically accounting for only a small portion of Cisco’s revenue, and now accounting for a very large percentage of global service provider capex, Cisco has strong incentives to try hard to grow its exposure to them.

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