Cisco Reports Tepid Results With Sustained Revenue Declines Across Key Product Segments

by Trefis Team
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Cisco (NASDAQ:CSCO) announced its Q4 fiscal year 2017 earnings on August 16, reporting a 4% decline in revenues to $12.1 billion. The decline in revenues was attributable to weakness across product segments, particularly the core switching and routing revenue streams. Additionally, collaboration and data center product sales observed limited growth over the comparable prior year period. Cisco’s gross margin (non-GAAP) for the quarter stood at 63.7%, which was around 90 basis points lower than the prior year quarter. Pricing pressure for hardware primarily drove product margins lower.

On the other hand, the company managed to restrict the increase in operating expenses (both R&D and SG&A), leading to a slight improvement in Cisco’s non-GAAP operating profit margin for the quarter. However, higher taxes and interest expenses led to a 12 cent decline in earnings per share to $0.48 per share for the quarter, which was significantly lower than the guided range of 60-62 cents a share.

We have a $33 price estimate for Cisco’s stock, which is in line with the current market price.

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Performance By Segment

Cisco has reported little or no growth in core product revenues in recent years, driven by pricing pressure on hardware and a shift of consumer preferences from standalone hardware products. This trend was evident in Cisco’s Q4 results, with all major product revenues streams reporting a decline in revenues on a y-o-y basis.

Comparatively, software solutions and other network security solutions sold by Cisco have performed well in recent years. Moreover, service-based revenues have also grown at a steady pace to offset the stagnating revenues from hardware sales. As shown below, network security revenues as well as services revenues were up, complemented by strong growth in wireless product revenues.

In recent quarters, market leader Cisco has demonstrated strength in the network security domain. The company added around 6,000 new customers in this space during the quarter, which was over three times its nearest competitor. Cisco now has over 80,000 customers for its network security solutions. Similarly, wireless revenues continued to impress, with 5% y-o-y growth during the quarter due to strong performance of Meraki and a refreshed product line for the 11ac Wave 2 products.

Full fiscal year results also highlighted similar trends. Most large product revenues streams continued to report negative growth rates, which were offset by strength in wireless and network security product segments. Service Provider Video revenues were significantly lower on a y-o-y basis following the company’s division to sell off its low-margin SP Video CPE business last year. Comparatively, services revenues rose 3% over fiscal 2016 to $12.3 billion.

Mild Guidance For First Quarter

Cisco’s management gave soft guidance for the fiscal first quarter, with revenues expected to fall by around 2% to $12.1 billion. Cisco expects its non-GAAP gross margin to be around 63.5% for the quarter, which is almost 2 percentage points lower than the first quarter of FY 2017. Similarly, operating profit margin (non-GAAP) is expected to be around 160 basis points lower than the year-ago period at 30%. Resulting non-GAAP diluted earnings per share are expected to fall by around 2% on a y-o-y basis to 60 cents a share.

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