10 Biggest Takeaways From Cisco's Q3 Earnings

Takeaways From Cisco's Q3

Cisco stock is still down after the networking giant's third fiscal quarter earnings report on Wednesday contained weaker than expected revenue guidance and news of an additional 1,100 job cuts. The company said those cuts were in addition to last year's layoff, which was announced in August and affects 5,500 jobs.

Cisco's stock is at $31.31 per share as of Thursday morning, down 7.5 percent from Wednesday after the market closed. During the earnings call with analysts, CEO Chuck Robbins and CFO Kelly Kramer talked about the company's future, market competition, sales declines and much more. Here are the 10 biggest takeaways from Cisco's third quarter, which ended April 29.

Huawei Is A 'Very Strong Competitor'

Although Huawei doesn't have a significant presence in North America, the Chinese networking and telecommunications giant appears to be on Cisco's mind. When questioned about competition in the service provider and emerging geographic markets, Robbins said Huawei "is a very strong competitor."

"I don't feel like it has increased significantly in the emerging countries," said Robbins. "It's been pretty consistent there, and our teams know how to compete and we continue to evolve our strategy and bring different tools to help them compete."

No Comment On Layoffs

Neither Robbins or Kramer mentioned the 1,100 layoffs during the earnings call that lasted approximately 45 minutes.

No information was given about the layoffs other than in Cisco's 10-K filing with the United States Security and Exchange Commission, which simply said, "In May 2017, we extended the restructuring plan to include an additional 1,100 employees with $150 million of estimated additional pretax charges."

Last August, Cisco launched an internal restructuring plan to prioritize areas such as security, cloud and the Internet of Things which included the elimination of up to 5,500 positions.

Software And Subscription Business Booming

Cisco has been striving to for years to transition itself away from simply a hardware vendor into a software and subscription-based company. That business grew 57 percent year over year, reaching $4.4 billion in sales .

"When we think about the strategy that we're deploying, the 57 percent growth in the software and subscription business – if you go back eight quarters ago we had $2 billion on our balance sheet relative to software and subscription," said Robbins. "Now we've more than doubled that to $4.4 billion, and the growth there is accelerating. We're very pleased with that transition."

Weak Q4 Guidance

A major reason why Cisco's stock plummeted 8 percent after the earnings report was revealed was due to a weaker-than-expected guidance for its current fiscal fourth quarter, predicting revenues to decline between four to six percent. Cisco said the weak guidance was due to revenue declines in its service provider and public sector business.

"The public sector business, particularly in the United States federal business … is a pretty significant stall right now with the lack of budget visibility," said Robbins.

Service Provider Declines Continue

Cisco's service provider (SP) business, which accounts for roughly 25 percent of overall sales, has been consistency declined over the last four quarters. The networking giant reported a 10 percent drop in SP revenues for its third quarter compared to one year ago. For its fourth fiscal quarter 2016, Cisco's SP revenues dropped 5 percent year over year, followed by a whopping 12 percent decline in its first fiscal quarter 2017, then a 1 percent declined in its second quarter.

Recurring Revenues

One great sign for partners is the company reported recurring revenues now account for 31 percent of Cisco's total revenue. One year ago, recurring revenue represented 29 percent of total revenue. Cisco is following through with its commitment to making recurring revenues a larger factor to its overall business that allows partners to capture rich services opportunities.

"Basically 90 percent of [Cisco's] services revenue is recurring," said Robbins. "What we're really trying to drive is more and more of those offers on the product side."

Security Still On Fire

Cisco security sales was the highlight of the earnings call, growing 9 percent to $527 million year over year, while deferred security revenues increased nearly 40 percent. The networking giant has reported double-digit growth in security for five consecutive quarters, which is now running at a $2.2 annual run rate.

"[Our security growth] reflexes our combination of best-of-breed solutions together with the industry's broadest security portfolio and a highly effected end-to-end security architecture," said Robbins, adding that Cisco gained 6,000 new firewall customer during the quarter. "We continued to lead in network security."

Routing Woes Continue

Cisco's second highest market segment of routing has been taking a hit over the past several quarters. The business segment declined 2 percent year over year to $2.03 billion for its third quarter.

CFO Kramer said routing was down during the quarter primarily due to weakness in Cisco's mobile pack core. Cisco's routing sales also fell 10 percent in its previous second fiscal quarter.

Sales Flat, Mixed Bag Overall

Cisco reported revenues of $11.9 billion during the quarter, down 0.5 percent year over year, slightly beating Wall Street expectations. Out of its six market segments, three were positive and three were negative in terms of revenues.

The company reported year over year growth of 2 percent in switching, 9 percent in security and a 13 percent jump in wireless for the quarter. Cisco's collocation business declined 4 percent, data center fell 5 percent and routing down 2 percent for the quarter compared to a year ago.

CEO: 'I'm Optimistic'

Robbins ended the earnings call by saying he was "optimistic" about where his company is heading over the next three to five years.

"Our customers really are going to be adding billions of connections in the future and they are going to need a next-generation network with security automation and analytics. And so we're transitioning the business model. We're transitioning the network offers that we're going to deliver to our customers as they move into this next generation," said Robbins.