Cisco Systems, Inc. Earnings Report Clarifies How Slow the Train Is Moving

Cisco is moving in the right direction, but it's taking too long to get there

Cisco earnings - Cisco Systems, Inc. Earnings Report Clarifies How Slow the Train Is Moving

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The good news is that the fiscal third quarter earnings report Cisco Systems, Inc. (NASDAQ:CSCO) posted Wednesday afternoon could have been worse. The bad news is that the outlook for the current quarter could have been better. Investors, seeing the glass as half empty rather than half full, sent CSCO stock lower to the tune of 4%.

Then again, who can blame them? The economy is booming — relatively speaking — and other technology giants like Nvidia Corporation (NASDAQ:NVDA) and even a beleaguered IBM (NYSE:IBM) are showing a pace of progress that Cisco appears unable to match. If it hasn’t happened yet, is it going to happen at all?

Cisco Earnings Recap

For the quarter ending in April, networking icon Cisco earned an operating profit of 66 cents per share on revenue of $12.46 billion. Both were up on a year-over-year basis.

The Cisco earnings report from the same quarter a year earlier indicated income of 60 cents per share and sales of $11.9 billion. More importantly, the fiscal Q3 numbers topped analyst estimates of 65 cents per share and a top line of $12.43 billion.

By and large, though, the earnings numbers left Cisco stock owners unsatisfied. Cybersecurity revenue of $583 million may have been up 11% from the year-ago quarter, but it fell short of the $584 million the pros were modeling. Meanwhile, services revenue of $3.16 billion was also up 3% but also fell short of the $3.24 billion analysts had expected.

Still, it wasn’t all bad. As CFO Kelly Kramer noted:

“We delivered strong results in Q3 with solid revenue growth of 4% and non-GAAP EPS growth of 10%. Our investment in innovation and continued execution are paying off. We saw broad-based strength across our portfolio, while continuing to shift our business model and deliver value for shareholders.”

The “investment” she spoke of meant acquisitions, particularly in the software arena, and they did pay off. Application revenue grew 19% YOY. Total deferred revenue was up 9% to $19 billion, securing at least a steady stream of cash flow for the foreseeable future.

What’s Taking So Long?

All in all, the Cisco earnings reports wasn’t a “bad” one, but it feels more like a report one would expect at the early stages of a rebuilding effort than the latter stages of an overhaul.

As a refresher, Cisco unveiled a new focus on software and subscription-based revenue in the middle of 2016, when it also upped the proverbial ante in enterprise security.

Investors have seen the company move in this direction to be sure, but not as quickly as one might expect. Security sales were up, as was noted, but they fell short of expectations and were up largely thanks to acquisitions rather than organic growth.

Meanwhile, only 32% of its revenue logged in the Cisco earnings report for Q3 was recurring revenue — less than one might hope for a project that’s been in place for nearly two years.

Some analysts have taken notice of the slow pace of the transition, too.

CFRA Research analyst Keith Snyder was one them, opining the company “needs to continue to aggressively pursue acquisition while also showing that it is utilizing acquired technologies to advance its own portfolio and support growth,” implying that the company isn’t adding much revenue-bearing value with all of its deal-making.

Synovus Trust Company portfolio manager Dan Morgan was also politely reserved, almost defending Cisco in saying, “Like other old smoke stack tech companies — MSFT, INTC, ORCL — this has been a somewhat of a slow process.”

Investors, however, were a bit less forgiving of the lackluster Cisco earnings report.

Looking Ahead for CSCO Stock

For the quarter currently underway, the company is expecting revenue growth of between 4% and 6%, translating into operating earnings of between 68 and 70 cents per share of CSCO stock.

The top-line outlook for between $12.62 and $12.86 billion is more or less in line with the average analyst opinion of $12.73 billion. The profit guidance is also in line with the 69 cents per share the pros are calling for in the fourth fiscal quarter of the company’s fiscal year.

The problem isn’t that Cisco won’t be able to hit those targets. The problem is that those targets are uncomfortably tepid for an organization that’s been working as hard as Cisco has been working to reinvent itself.

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.

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