Cisco Systems, Inc. (NASDAQ:CSCO) was expected to post strong earnings and didn’t disappoint. Indeed, CSCO earnings delivered Cisco Systems’ strongest revenue growth in three years.
Cisco has been enjoying solid and steady growth in IT spending as it successfully expands software and cloud service businesses among enterprise and carrier networking customers. It’s been a long and painful transition for Cisco — and CSCO stock — to software-defined networking and a recurring revenue model.
Moving beyond its core routing and switching business has been fraught with risks, but the latest results allowed Cisco to proclaim the end of that transition period. Indeed, CSCO CEO John Chambers told FT.com that quarterly earnings indicate that “Cisco is not just back, it’s back with a vengeance.”
One of the big worries heading into the CSCO earnings report was the stronger dollar, which has been hurting revenue at U.S. multinationals. Although foreign exchange shaved off some revenue, it didn’t derail an otherwise strong quarter.
In other good news for anyone holding CSCO stock, Cisco said there’s a better chance that the U.S. will allow some companies to repatriate cash held overseas without paying the full tax hit on those earnings.
The best news by far, however, was that revenue surged on increasing demand for CSCO’s renovated networking hardware.
CSCO Results Beat the Street
Cisco earnings came rose to $2.4 billion, or 46 cents per share, from$1.43 billion, or 27 cents per share, in last year’s fiscal second quarter. On an adjusted basis, however, CSCO earnings came to 53 cents per share, exceeding analysts average estimate of 51 cents per share, according to a survey by Thomson Reuters.
CSCO revenue likewise beat Wall Street estimates, rising to $11.94 billion from $11.16 billion. Analysts projected revenue of $11.8 billion.
Surprisingly, growth returned to Europe where revenue rose 7%. The U.S. remained strong, which is good news for the wider IT industry, to say nothing of the economy. CSCO is very sensitive to the business cycle, which makes it a bellwether of sorts.
Emerging markets continued to rebound, however, thanks to rising orders from Mexico and India.. Taken as a whole, revenue from emerging markets rose just 1% in the quarter. The big weight on the segment continued to be China, where orders fell 19%.
Expanding profit margins also helped instill more investor confidence. Gross margin rose to 61.7% from 61.3% the year before — a significant improvement.
Also boosting Cisco stock — which hit a multiyear high on the earnings news — was an increase to the dividend. The quarterly payout goes to 21 cents a share from 19 cents a share.
With the worst of the downturn in overseas markets behind it, times are looking much brighter for Cisco stock. The hardest part of its painful transition is behind it, and the market is rewarding Cisco stock. No wonder the CEO says he hasn’t felt this good in three years.
Strong results in the U.S. and an improving global backdrop should help CSCO take full advantage of its new products and services. More upside ahead for CSCO won’t be surprising to see.
As of the writing, Dan Burrows did not hold a position in any of the aforementioned securities.
