If you thought Cisco Systems, Inc. (NASDAQ:CSCO) was a has-been that would never be able to rekindle revenue growth, guess again. In its second fiscal quarter of the year, the networking giant saw its first year-over-year sales growth in eight quarters, pushing CSCO stock firmly higher on Thursday and then a little higher still on Friday. CSCO stock is now up 45% for the past six months.
Though CSCO stock is technically overbought and arguably overvalued at a trailing P/E of 23.2, the bulls might have the right idea. The company has been struggling for a couple of years now, but it’s on the verge of enjoying the fruits of all its labor.
Cisco Earnings Recap
For the quarter ending in January, Cisco turned $11.9 billion worth of revenue into a per-share profit of 63 cents. The top line was up 3% YOY. The bottom line was better than the 57 cents per share the company earned in the same quarter a year earlier. Analysts were only expecting a profit of 59 cents per share and sales of $11.8 billion.
Total infrastructure platform sales were up 2% YOY, to $6.7 billion. Applications revenue of $1.2 billion was up 6%, and security revenue grew 6% YOY to $558 million.
CEO Chuck Robbins commented on the quarterly numbers:
“We had a great quarter which demonstrates that our strategy is working. Our business is growing, we have a fantastic innovation pipeline, our balance sheet is strong and we have a team that’s executing incredibly well. The network is more critical to business success than ever, and our new intent-based networking portfolio has great momentum including the fastest ramping new product in our history.”
The new product that ramped up so rapidly is the Catalyst 9000 — a subscription-based switching platform that’s now being used by more than 1,100 customers.
The success of the relatively new recurring-revenue product is just a microcosm of Robbins’ rethinking of how Cisco wants to drive sales. At the beginning of 2015, only 6% of the company’s product revenue was recurring revenue. Thanks to last quarter’s 36% YOY increase in recurring product revenue, that repeat business accounts for 13% of the company’s total revenue.
Counting apps and software, 33% of Cisco’s business is now recurring. More than half of the company’s software revenue was subscription-based revenue.
Turnaround Complete?
While the shift toward more recurring revenue crimped the top line initially, it sets the stage for reliable revenue growth with healthy margins. CFO Kelly Kramer commented, “That steady increase in the transformation of the business to more subscriptions and software, that just continues to grow, every quarter we make progress.”
Though Cisco has much more work ahead, last quarter’s results were the light at the end of the tunnel most owners of CSCO stock were waiting on.
Raymond James analyst Simon Leopold commented, “Cisco’s core business seems to be turning for the better, despite the lag in routing and the service providers vertical,” adding, “We continue to see evidence of the pivot towards more recurring and higher software content revenues, which creates a sales headwind but provides a margin tailwind.”
And yet, Robbins remains reticent to qualify or quantify the second quarter numbers as the true beginnings of a turnaround, only saying, “I am always hesitant to call any inflection, but I am not surprised about the improvement.”
Kramer wasn’t as reserved, however, pointing out, “We are seeing the benefits as we shift the business model and you are seeing it translate through fantastic financials.” He clarified in a separate interview, “We’ve been talking about the shift to software, and we’ve been deferring our revenue, and you’re seeing that it doesn’t impact our cash.”
Looking Ahead for CSCO Stock
The next move some analysts are predicting from Cisco is a more significant acquisition. The company’s got $67 billion in cash held overseas, but after paying some bills and other expenses, Kramer anticipates liquidity of around $12 billion accessible in the foreseeable future.
That won’t be quite enough to fund a cash purchase of the oft-rumored target Arista Networks Inc (NYSE:ANET). More affordable possibilities like Palo Alto Networks Inc (NYSE:PANW) and ServiceNow Inc (NYSE:NOW) have also been suggested as possible targets.
In the meantime, barring any deals that would change the numbers, Cisco is expecting revenue growth of between 3% and 5% for the quarter currently underway, which should create earnings of between 64 cents and 66 cents per share of CSCO stock. Analysts are calling for an average of 65 cents per share on a 4% improvement in the top line.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
