Cisco's Transition Is In 'Full Swing'

Cisco Systems, Inc. CSCO reported Wednesday after the market close its fiscal fourth-quarter non-GAAP earnings per share of 61 cents, in line with estimates, on revenues of $12.1 billion, down 4 percent year over year.

For fiscal year 2018's first quarter, the company said it expects non-GAAP earnings of 59–61 cents on a 1–3-percent decline in revenues. This compares to the consensus estimates, which call for non-GAAP earnings of 60 cents per share on a 2.3 percent revenue decline.

Commenting on the results, Bernstein said in a note Thursday that transition is in full swing. The firm maintains its perspective on Cisco, with rating and price target at Outperform and $38, respectively.

At the time of writing, Cisco shares were down 3.18 percent at $31.31.

Breaking Down The FQ4 Metrics

Analyst Pierre Ferragu attributed the revenue weakness primarily to switching, which fell 70 percent year over year. Recurring revenues, accounting for 31 percent of the total sales, rose 4 points year over year.

The analyst noted that deferred revenues from subscriptions and software fell 14 percent sequentially but rose 50 percent year over year to $619 million. Subscription product revenues, accounting for 11 percent of the total product revenues, rose 11 percent, faster than the 10-percent increase in the third quarter and the 7.5 percent increase in the year-ago quarter, the analyst added.

Bernstein termed the increase in subscription product revenues, which reached $1 billion for the first time, as fast, with the 20 percent 2020 target of the company looking achievable now.

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Commercial Momentum Coming Back

On the guidance, the firm said it suggested commercial momentum is coming back progressively. Clarifying its statement, the firm said the guidance range suggested a sequential change in the range of down 1.2 percent to up 0.5 percent, which is 50–250 basis point above normal seasonality. The is in line with flat order growth compared to the year-ago, the firm added.

Bernstein does not see the 70-basis-point sequential drop and a full point year-over-year drop in gross margin as a source of disappointment. The firm believes the decline was due to continued pressure on DRAM costs and lower level of revenues in the quarter, driving negative operating leverage.

Concluding, Bernstein said, "Cisco continues to be successful in the transition to subscription, which will drive over time more stable revenues, better profitability and better growth."

"The transition itself generates a material headwind on revenues, but it has peaked and will abate slowly in coming quarters."