5 Key Metrics From Cisco Systems' Earnings Report
Shares of Cisco Systems (NASDAQ: CSCO) carved out a new 52-week high last week after the networking hardware company reported its fiscal first-quarter results. Cisco beat expectations slightly for both revenue and earnings, but the real story was its guidance. For the first time in two years, Cisco expects to produce revenue growth during its second quarter.
Cisco's efforts to transition to a recurring revenue model and to grow smaller businesses like security are helping to offset declines in the core hardware business. Beyond the headline numbers, here are five key metrics that provide a more complete picture of Cisco's results.
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1. 32% of revenue was recurring revenue
Cisco's core business is selling networking hardware, but the company has been growing its software and services businesses over the past few years. The goal is to transform from a seller of boxes into a seller of solutions.
One way to measure Cisco's progress is to track how much of its revenue is recurring. Like many tech companies that sell software, Cisco is moving to a subscription model, which can provide more predictable and reliable sources of revenue. During the first quarter, 32% of Cisco's total revenue came from recurring sources, up three percentage points year over year.
Deferred revenue related to recurring software and other subscription offers jumped 37% year over year in the first quarter to $5.2 billion. This total will be recognized as revenue over time, and it's starting to get big enough to move the needle for Cisco.
2. 100% of new line of switches include a subscription
This recurring revenue push from Cisco is broad, affecting even the core switching and routing businesses. Cisco unveiled its latest line of switches, Catalyst 9000, back in June. These switches, combined with machine learning and analytics software, promise to improve security and automate routine tasks.
More than 1,100 customers have adopted the Catalyst 9000 switching platform, which comes with a subscription by default. Cisco CEO Chuck Robbins said during the earnings call that "the vast majority" of customers opted for the most advanced software subscription offer, with the rest choosing a more basic version. Either way, the Catalyst 9000 platform is contributing to Cisco's recurring revenue.
3. 1.5% to 2% revenue hit from recurring revenue
There is a downside to this shift to subscriptions and recurring revenue. Because this revenue is recognized over time instead of all up front, growth in recurring revenue creates a headwind for overall revenue growth in the near term. This headwind is currently knocking down revenue growth by 1.5% to 2% on a year-over-year basis, and CFO Kelly Kramer expects this to grow as the subscription business continues to ramp up.
This headwind is one reason why Cisco has suffered from eight consecutive quarters of year-over-year revenue declines. It will eventually subside once the subscription business becomes large enough, but that may still be years away.
4. 8% growth in security revenue
Cisco reconfigured its reporting segments starting in the first quarter, lumping hardware and applications into two separate categories. The security segment was left unchanged, though, giving investors a clear picture of how fast that business is growing. Security sales were up 8% year over year during the first quarter.
Cisco's security strategy is to offer comprehensive security solutions, rather than focusing on a single area. The company is already one of the leaders in this market, which is heavily fragmented. Growth in demand for cybersecurity products and services along with the inevitable consolidation of the market leaves Cisco with a long growth runway. Cisco's deferred revenue from security shot up 42% year over year during the first quarter, an indication that Cisco's strategy is working.
5. 1% to 3% revenue growth in the second quarter
Despite the subscription headwind, Cisco expects to return to growth in the second quarter. The company guided for year-over-year revenue growth between 1% and 3%. If it hits that guidance, it will be the first time Cisco has produced revenue growth since the end of 2015.
Whether this marks a sustained return to growth or ends up being nothing more than a blip remains to be seen. Cisco's revenue can swing up and down based on numerous factors, like macroeconomic uncertainty and delayed orders from some of its large customers. It may take a few quarters of results to get a sense of whether Cisco's transformation is finally starting to yield results.
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Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.
