After the bell Cisco delivered slight upside to the Street’s estimates for FY3Q18 (April) with some momentum starting to build in the field for the company on the heels of its software centric approach, albeit the Street was looking for more this quarter and thus could see a negative knee jerk reaction in shares accordingly. The company reported total revenues and EPS of $12.46 billion and $0.66 vs. the Street’s $12.43 billion and $0.65 estimates, basically an in-line quarter with the bulls hoping for a bigger beat. All product segments came in ahead of expectations, with total product revenue of $9.30 billion ahead of expectations of $9.19 billion, while services revenue of $3.15 billion came up a bit light of the Street’s $3.23 billion estimate. Gross margins of 63.9% were in line with our estimates with operating margins of 31.5% coming in slightly above expectations. While the macro environment remains a bit uneven especially on “large ticket” traditional networking deals, we are seeing the combination of better execution this quarter, newer product initiatives on cloud/security/IoT, and the focus on recurring revenue translating into a modestly improved selling environment for Cisco in the field and an expanding pipeline heading into the rest of FY18/early FY19. On the guidance front for the July quarter, the company gave an outlook generally in line with Street expectations with some isolated soft spots. Taking a step back, the broadened Cisco portfolio and software centric approach has been a catalyst for the company, as we believe the company’s multi-faceted hardware/software centric approach is music to ears of customers and partners. While the company has clear challenges given secular headwinds in its traditional sweet spot of switching/routing, we believe Cisco is slowly putting together newer growth engines (e.g. security, SaaS model, Cisco ONE, cloud initiatives) to help lay the groundwork for a stronger bookings growth trajectory in FY18/FY19. We expect to hear more details around the quarter, the company’s software centric approach/data points and guidance on the call coming up this afternoon. We maintain our Attractive rating and $51 price target.
Slow and steady progress; some secular speed bumps remain. While management has refocused the company on its core bread and butter networking market with a major product refresh on the horizon over the next 18 to 24 months, clearly Cisco needs to be positioned well on the transformational cloud shift among enterprises over the coming years and not be left behind. Although acquisitions such as BroadSoft could play a major role here bolstering Cisco’s cloud product footprint, the company’s ability to successfully transform (e.g. SaaS, subscription based model) its business model over the coming years remains the biggest wild card in the eyes of investors on the name. That said, while Cisco continues to struggle driving growth in the near term, we believe the stage is set for the company to see a renaissance of modest growth (~5%) return to the story over the coming years on the heels of more subscription based software revenue and newer growth initiatives which could help the stock get re-rated over time.