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Growth Businesses Fall Short for Cisco Systems

Image source: Cisco Systems.

Networking hardware giant Cisco Systems (NASDAQ: CSCO) reported its fiscal first-quarter results after the market closed on Nov. 16. The company's results came in at the high end of its guidance, but Cisco expects the second quarter to be much weaker. Growth areas such as collaboration and the data center suffered declines during the quarter, while security continued to post robust growth. Here's what investors need to know about Cisco's first-quarter results.

Cisco Systems results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$12.35 billion

$12.68 billion

(2.6%)

Net income

$2.32 billion

$2.43 billion

(4.4%)

Non-GAAP EPS

$0.61

$0.59

3.4%

Data source: Cisco Systems.

What happened with Cisco Systems this quarter?

Adjusted for the sale of the SP Video CPE business, Cisco's revenue was in line with the high end of its guidance.

  • Adjusted revenue grew by 1% year over year.
  • The switching segment suffered a 7% decline in sales, generating $3.72 billion of revenue.
  • The routing segment produced $2.09 billion of revenue, up 6%.
  • The collaboration segment, which has been growing in recent quarters, suffered a 3% sales decline, with $1.08 billion of revenue.
  • Data center revenue dropped 3% to $834 million.
  • Wireless revenue dropped 2% to $632 million.
  • The security segment continued to grow at a double-digit rate, with revenue of $540 million representing growth of 11%.
  • Service provider video, excluding the SP Video CPE business, slumped 2% to $271 million.
  • Deferred revenue rose 12% year over year to $17 billion, driven by subscription-based software.

Cisco's second-quarter guidance fell short of expectations.

  • Revenue is expected to decline by between 2% and 4%, excluding the SP Video CPE business.
  • GAAP EPS expected between $0.42 and $0.47, while non-GAAP EPS expected between $0.55 and $0.57. For the second quarter of last year, non-GAAP EPS came in at $0.57.

What management had to say

Cisco CEO Chuck Robbins summed up the quarter:

We had a good quarter despite a challenging global business environment and we performed well in our priority areas. We are leading our customers in their digital transition by providing them with highly secure, automated, and intelligent solutions in the ways they want to consume them. Our innovation pipeline is robust and we are well positioned for the future.

Kelly Kramer, CFO of Cisco, discussed the shift to a subscription model:

We executed well in Q1 delivering profitable growth, and saw strong adoption of our subscription-based and software offerings as we transition our business to a more recurring revenue model. We will invest in key growth areas and continue to focus on delivering shareholder value.

Looking forward

One thing hurting Cisco's results is its ongoing shift toward a subscription business model. The security segment grew revenue by 11% year over year, but deferred revenue soared 39%. While collaboration revenue slumped 3%, deferred revenue jumped 14%. Cisco singles out the growth of software-as-a-service within these segments as one reason for the discrepancy.

With only one growth business, security, posting growth during the first quarter, and with guidance for the second quarter calling for a revenue decline, the difficult environment Cisco finds itself in is taking a toll on the company.

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Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.