Networking equipment and software maker Cisco Systems (CSCO – Free Cisco Systems Stock Report) reported mixed results for the October quarter and provided a cautious outlook on its operating environment, causing the shares to decline moderately in price.
Revenue of $13.2 billion grew 2% year over year, less than our estimate of 3.5% growth. The adjusted operating margin expanded 130 basis points, thanks largely to a mix shift toward more lucrative software. This helped earnings per share of $0.84 grow 12%.
Total product revenue increased 1%. The core Infrastructure Platforms unit saw its top line fall 1%. All of the segment's subdivisions were up except for routing, due to weakness in the service provider vertical. Switching had growth in both campus and data center, with a continued ramp of the Catalyst 9000 and strength from the Nexus 9000 lines. Data center had solid growth, led by HyperFlex. Application revenue increased 6%, with growth across all the businesses, including a double-digit advance from AppDynamics. Security continues to be a stand out category, growing 22% year over year.
Service revenue rose 4%, driven by software and solution support. Importantly, software subscriptions were 71% of total software revenue, up 12 percentage points.
Cisco's order book displayed some weakness, as total product orders were down 4%. Orders from service provider customers continued to be soft, declining 13%. Management thinks business will start to pick up in the second half of 2020, as demand for 5G capacity will necessitate mobile backhaul upgrades. The transition to Wi-Fi 6 and 400-gig networking products are other catalysts on the horizon. Meanwhile, the public sector was once again a bright spot, with orders there rising 6%. The biggest change from the prior quarter was enterprise and commercial orders, with each of those falling 5%.
In general, weakness in the global macro environment was more-broad based than in the previous quarter. Management doesn't expect any further deterioration, but is not forecasting improvement either. It pointed to the China-U.S. trade war, civil unrest in Hong Kong, impeachment proceedings in Washington D.C., Brexit, and political turmoil in Latin America as contributors to some customers' uncertainty. It believes improvement in any of these situations should help business confidence.
For the January quarter, Cisco expects revenue to decline 3% to 5% and earnings to range from $0.75 to $0.77, versus $0.73 in the year-ago period.
Despite the near-term headwinds, the company is still well positioned to take advantage of attractive long-term technology transitions. We continue to recommend the shares to most investors.
About The Company: Cisco Systems Incorporated is a leading provider of Internet Protocol-based networking and other products for transporting data, voice, and video across geographically dispersed local-area networks, metropolitan-area networks, and wide-area networks. Devices are primarily integrated by Cisco IOS Software and include Routers, Switches, New Products, and Other. Provides services associated with these products.