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Stock Analyst Update

Cisco Continues Shift Toward Subscription Revenue

The narrow-moat firm's results were solid, and its fourth quarter forecast is in line with our expectations.


 Cisco (CSCO) reported solid fiscal third-quarter results and provided investors with a decent fiscal fourth-quarter forecast that was in line with our expectations and Street consensus estimates. The company continues to make progress in shifting toward subscription revenue, both in infrastructure platforms boosted by early adoption of the firm’s Catalyst 9000 switches, as well as noninfrastructure businesses like applications and security. We will maintain our $40 fair value estimate for narrow-moat Cisco, and despite a 4% after-hours sell-off, we would continue to seek a wider margin of safety before investing.

Cisco’s revenue in the April quarter was $12.5 billion, up 4% year over year and squarely within the company’s previously forecast range of 3%-5% growth as discussed in February. Infrastructure platforms revenue was $7.2 billion, up 2% year over year. Management cited year-over-year growth in switching products in both the data center and campus, with campus growth driven by the 9000 series. The company’s data center business saw strong double-digit growth within the IP segment. Such growth was offset by declining revenue from routers, mostly among products sold to service provider customers. Yet Cisco fared well outside of networking gear, as applications and security revenue rose 19% and 11% year over year, respectively. On the profit front, adjusted gross margin of 63.9% came in at the high end of the firm’s forecast range despite headwinds due to higher component prices, while adjusted operating margin of 31.5% exceeded Cisco’s prior forecast and our expectations.

For the July quarter, Cisco foresees 4%-6% year-over-year revenue growth, but relatively flattish adjusted gross margins and a 100- to 200-basis-point decline in adjusted operating margins on a year-over-year basis. Recent acquisitions of AppDynamics and Broadsoft are expected to cause a relatively higher uptick in operating expenses compared to the prior year.

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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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