Cisco Sees Increased Software Sales, Recurring Revenue Helped By Catalyst 9000 Platform

Steady product revenue growth, which led to a solid uptick in recurring revenue, is pointing the way for a good future for Cisco, company executives said.

Recurring revenue accounted for about 32 percent of total revenue in the third fiscal quarter of 2018, while subscriptions accounted for about 55 percent of total software revenue, the company told financial analysts on Wednesday's financial analyst conference call.

This represents steady progress in moving to a software-based and recurring revenue-based model, said Chuck Robbins, Cisco chairman and CEO, in his prepared remarks.

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"We are executing well against the strategy we put in place three years ago," Robbins said. "Our innovation pipeline has never been stronger. And we continue to transform our business to reflect the ways customers want to consume our technology. … We also made steady progress in shifting more of our business towards software and subscriptions."

Customers are in general consuming services from multiple cloud and technology providers, forcing them to managed increasingly complex IT infrastructures, Robbins said. "We have been evolving our portfolio to address this complexity," he said.

The need for simplicity is helping drive different parts of the Cisco portfolio including its ACI software-defined networking, its Cisco UCS servers, and its HyperFlex hyper-converged infrastructure offerings, Robbins said.

Cisco's total revenue for its third fiscal quarter, which ended April 28, reached $12.5 billion, up 4 percent over the third fiscal quarter of 2017.

Sales to Cisco's Americas customers rose 4 percent over last year, compared to a 6-percent rise to EMEA (Europe, Middle East, and Africa) and a 3-percent rise in the Asia Pacific, Japan, and China region.

Enterprise sales rose 11 percent over last year, compared to a 2-percent rise in public sector sales and a 7-percent rise in commercial sales, tempered by a 4-percent fall in sales to service providers.

The revenue growth included a 2-percent rise in infrastructure platform revenue to $7.16 billion, a 19-percent rise in application revenue to $1.31 billion, an 11-percent rise in security revenue to $583 million, and a 2-percent rise in services revenue to $3.16 billion. Revenue growth was tempered by a 6-percent drop in revenue from other products, the company said.

On the infrastructure side, revenue grew across the board, with the exception of router products, which saw a decline.

Going forward, Cisco's infrastructure business will be driven in part by sales of its Catalyst 9000 family of switches, which Robbins called the fastest-ramping product in the company's history. The company during the third quarter had over 5,800 customers using the Catalyst 9000, up from 3,100 customers in its second fiscal quarter.

"We're really pleased with the acceptance of this product," he said. "We added 2,700 customers in the quarter. If you think about it, that's over 40 new customers per day."

When asked by an analyst whether the addition of 40 new customers daily is a very relevant number given Cisco's large customer base, Robbins said the company has about 140,000 customers, giving it a strong base for future growth as the Catalyst 9000 replaces older Catalyst 3000 and Catalyst 4000 switches.

The Catalyst 9000 has a long future ahead, and will drive a big portfolio of related products and services because customers do not upgrade because it is a cool switch, Robbins said. "It's because they're buying into this portfolio over a long time," he said.

Kelly Kramer, executive vice president and chief financial officer, said that Cisco's recurring revenue at 32 percent of total revenue, while up over all in dollar terms, was down slightly from the 33 percent figure in the second fiscal quarter of 2018 despite the recent software vendor acquisitions.

The AppDynamics acquisition has been in the numbers for some time, while the BroadSoft acquisition included a mix of recurring and non-recurring revenue, Kramer said.

"The bigger impact on the number is really just the mix of the products," she said. "We have product revenue growing 5 percent, and services revenue growing 3 percent. And within that product revenue, we had very, very strong server revenue growth, which has a very low software recurring component of it. That's what's really driving it."

For the quarter, Cisco reported GAAP net income of $2.7 billion, or 56 cents per share, up from the $2.5 billion, or 50 cents per share, it reported for the third fiscal quarter of 2017.

On a non-GAAP basis, Cisco reported net income of $3.2 billion, or 66 cents per share, up from last year's $3.0 billion, or 60 cents per share. That beat analyst expectations by 1 cent per share, according to Seeking Alpha.

Looking forward, Cisco expects revenue in its fourth fiscal 2018 quarter to grow between 4 percent and 6 percent over the fourth fiscal 2017 quarter. The company is also guiding for GAAP earnings per share from 55 cents to 60 cents per share, or from 68 cents to 70 cents per share on a non-GAAP basis. The outlook was generally within expectations, according to Daniel Ives, head of technology research at GBH Insights.