The “move to digital” was the main theme on Cisco (NASDAQ:CSCO) earnings conference call on the 10th of February after market close. Cisco produced an impressive set of Q2 earnings (EPS of $0.57 non-GAAP and $0.62 GAAP) beating estimates of $0.54 per share by some distance considering the weak guidance it had for this quarter. Revenue came in at $11.8 billion (excluding a divestiture from the SP Video CPE Business which was $93 million) which also beat estimates of $11.76 billion but it was fiscal third quarter guidance that really made the stock rally hard. Cisco is guiding a jump in year over year revenues of 1 to 4% this coming quarter and if this comes to pass on the high part of the range (like it did in Q2), then top line sales could come in as high as $12.62 billion.
Cisco always is conservative with its guidance numbers so this figure is easily attainable. If there were any lingering doubts that investors had about Cisco’s longevity, I believe they were answered in this set of earnings results. Why? Well, routing bounced back this quarter reporting $1.845 billion in revenues and growth of 5% compared to fiscal Q2 in 2015. This was important because of the 8% decline in the first quarter but also because this division and switching make up almost 50% of revenues.
Routing revenue growth has been flagged by some analysts as being at risk due to telecom service providers seeking alternative solutions so growth here definitely was welcome. However, switching revenues dropped by 4% to $3.48 billion which was probably priced into the Cisco stock despite this division growing by 5% in the first quarter. Revenue growth has been poor of late in switching despite management’s bullish calls on the new generation switches which are expected to make a difference around the fag end of 2016. Only time will tell whether this division can regain its former glory but the market it seems has priced in lower growth here plus declining margins.
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