Fwd: Subscription Mstar Cisco's Software, Subscription Revenue Impresses

Cisco's Software, Subscription Revenue Impresses

An announced acquisition of AppDynamics will further strengthen these trends, but we recommend investors to seek a wider margin of safety before investing in the narrow-moat firm.

Ilya Kundozerov

Feb 16, 2017

Mentioned: Cisco Systems Inc (CSCO)

 Cisco (CSCO) posted second-quarter fiscal 2017 results largely in line with our expectations and management's guidance. The continuous weakness in switching and routing was offset by solid growth in security, wireless, and collaboration segments. Moreover, the latter three are the driving force behind accelerating deferred revenue growth, 12.5% over a year ago. We are particularly impressed with 51% growth in software and subscription deferred revenue, especially given the higher gross margin nature of this revenue stream, and we believe that an announced acquisition of AppDynamics will further strengthen these trends. We are modestly raising our fair value estimate by $1 to $28 per share to reflect these developments. With shares trading at a premium to our new fair value estimate, we recommend potential investors to seek a wider margin of safety before investing.

Total revenue for the quarter was $11.6 billion, down 2% year over year on a normalized basis. Campus Ethernet switching remains a problem for Cisco, as revenue declined in the switching segment by 5% year over year and 11% sequentially. It is conceivable that headwinds in campus switching will continue and we see growth in the customer count for Ethernet core Nexus 9000 and ACI products as a counterbalancing trend. As we expected, the company's routing segment posted a moderate revenue decline of 1.5% as large carriers shifted capital expenses to other parts of the network. On the positive side, Cisco's security segment posted solid gains of 14% year over year due to new product ramp ups. Wireless revenue grew 3% with a help of Meraki business and solid adoption of 802.11ac wave 2 wireless products, while the collaboration segment delivered another strong quarter with 9% year over year growth due to WebEx and telepresence sales. Cisco's data center segment continues to face headwinds, posting a 4% yearly decline as customers shift spending to hyperconverged systems and migrate workloads to the cloud.

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