Cisco Off to Strong Start in Fiscal 2019

Networking giant Cisco (CSCO) is off to a strong start in its fiscal year 2019 as its first quarter report, released November 14, revealed total revenue growth of 8% on a year-over-year basis amid its ongoing business model transformation. The transformation to a greater focus on software subscription revenue has been in part accelerated by inorganic growth such as the recent $2.35 billion acquisition of Duo Security, which brings cloud-based identity solutions for unified access security, a focus consistent with Cisco’s attempts to add more SaaS offerings to its security portfolio.

Concerns surrounding the implications of the ongoing trade dispute with China appear to have been put to bed for the time being as well as Cisco noted that there was no impact to its demand as it enacted price increases to combat tariffs on a number of its core networking products. Uncertainty related to the situation persists, but management looks to be relatively confident in its ability to pass through the tariff burden to its customers.

Total product revenue at Cisco in its fiscal first quarter advanced 9% from the year-ago period as Infrastructure Platforms revenue (~58% of total revenue in the quarter) increased 9% on broad-based strength, Applications revenue (~11% of total revenue) was up 18%, and Security revenue (~5% of total revenue) grew 11%. Services revenue (~24% of total revenue) growth of 3% on a year-over-year basis was driven by strength in software and solutions support.

Software subscriptions as a percentage of total software revenue continues to march higher, reflective of the progress Cisco is making on its business transformation, and management points to the metric as the most meaningful in terms of gauging such progress. As of the first quarter of fiscal 2019, the figure was 57%, up 5 percentage points from the comparable period of fiscal 2018 and 1 percentage point sequentially. The company’s non-GAAP gross margin expanded slightly in the quarter, and its non-GAAP operating margin grew by 1.5 percentage points from the year-ago period to 31.9%, which translated into 23% year-over-year non-GAAP earnings per diluted share growth to $0.75.

Cisco continues to be a robust free cash flow generator, and it turned in free cash flow of nearly $3.6 billion in the quarter, roughly 21% higher than that of the first quarter of fiscal 2018, thanks to a slightly higher rate of growth in cash provided by operating activities. Cash dividends paid in the quarter came in at $1.5 billion, revealing ample coverage of the payout with free cash flow, but the company repurchased more than $5 billion of its shares in the period. These transactions were made at an average price per share of ~$46, which sits in the lower half of our fair value range that is anchored by a midpoint, or fair value estimate, of $54 per share, and the company has approximately $14 billion in authorized funds remaining in its share repurchase program as of the end of the quarter.

A cash, cash equivalents, and short-term investments balance of $42.6 billion compares favorably to Cisco’s total debt load of nearly $25.6 billion, and we continue to be big fans of the financial flexibility this affords management in pursuing growth initiatives, both organic and inorganic, and returning cash to shareholders. The company’s Dividend Cushion ratio is an impressive 3 at last check, which is even more notable when considering its dividend yield of ~3% as of this writing, and we’re expecting strong growth in the payout to continue in the years ahead.

We expect to continue highlighting shares of Cisco in both simulated newsletter portfolios for the foreseeable future as they present an opportunity for capital appreciation as well as consistent and robust income generation for shareholders.

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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.