Cisco Systems stock up on stellar Q3 results, solid revenue outlook

Shares of the Cisco Systems (CSCO) increased 3% after the third quarter results surpassed estimates aided by strong growth across the board. The company reported strong Q4 revenue outlook while EPS guidance came in line with estimates, which is good news for investors. The company’s stock has popped up 21% in 2019 backed by solid earnings results touching a new 52-week high of $57.53 in April.

As the trade war between the US and China intensified, shareholders were worried whether this could have an impact on margins. The solid guidance also clears the air that the networking giant is not facing any headwinds due to tough macros.

Cisco reported a 6% jump in revenues of $13 billion and adjusted earnings rose 18% to $0.78 per share, excluding video business divestiture. Analysts were expecting adjusted EPS of $0.77 on revenues of $12.89 billion. Last quarter, the company guided revenue growth of 4-6% while Non-GAAP EPS in the range of $0.76-0.78.

Looking ahead, Q4 revenue is expected to grow 4.5% to 6.5% and adjusted EPS to come in the range of $0.80 to $0.82. The fourth quarter revenue guidance is higher than the street estimates, while EPS outlook fell in line with estimates. Analysts expect revenue of $13.29 billion and non-GAAP earnings of $0.81 per share.

Commenting on the solid Q3 results, CEO Chuck Robbins said: “Our strong performance in the quarter was across the business, reflecting our customers’ confidence in our strategy, business model and market-leading portfolio”.

Hardware business grew 5% to $7.55 billion backed by solid growth from its products as demand for network switches are expected to be high. It’s worth noting that Catalyst 9000 switch launched a couple of years ago has been well received by its customers and continues to bring in solid revenues to the networking firm. In the Q3 period, it completed the acquisition of network automation firm Singularity Networks.

Cisco has been beefing up its Applications and Security divisions by acquisitions (Duo Security and Luxtera). The networking gear maker has been investing in high-growth businesses like cloud, Internet of Things, data centers and security. Applications division revenue rose 9%, while the Security segment saw a double-digit jump of 21% as a result of the ongoing transition, which is yielding results.

The company is transitioning itself from a products-based model towards software and subscriptions, which reduces its dependency on the hardware sales. The transition would help the firm to bring in stable revenues along with better margins reducing the volatility impacted by tough macros. Currently, the product-service revenue split is 75%/25% and the latter metrics are expected to increase in the near future.

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