Denys Rudyi - Fotolia
Cisco released quarterly earnings that suggested its yearslong shift from networking hardware to software had started to pay off, as revenue from security and software grew at a significant clip.
Cisco reported this week its revenue in the second fiscal quarter ended Jan. 27 rose 3% to $11.9 billion, marking the first increase in more than two years. The day after the announcement, the company's stock opened at $45.09 per share -- a 17-year high.
Investors turned bullish on Cisco because of the latest report and the company's forecast for the current quarter. Cisco revenue was predicted to continue growing in the current quarter by 3% to 5%.
Applications and security stood out in the quarter. Sales of each product division rose 6% year over year. Applications include Cisco's collaboration and internet-of-things software and AppDynamics, a suite of software tools for managing application performance. Security encompasses hardware appliances, software and cloud-based services. Products include intrusion detection, firewalls and identity management.
"These areas are where the company made its biggest investments and will determine the company's long-term future," said Patrick Moorhead, a principal analyst at Moor Insights & Strategy, based in Austin, Texas.
Where Cisco revenue could grow in the future
Cisco is banking on continued growth in software sales to drive its strategy of reducing revenue dependency on networking gear, especially switches and routers -- both declining businesses. By the fiscal year 2020, Cisco wants half its revenue to come from services and subscription-based recurring revenue from software.
Cisco reported recurring revenue accounted for 33% of total revenue in the quarter, up two percentage points from a year ago. Thirteen percent of product revenue was recurring, an increase of three percentage points.
Despite Cisco's progress, the company still faced a "long and arduous" turnaround, said Glenn O'Donnell, an analyst at Forrester Research. A full recovery will depend on whether Cisco can strengthen its infrastructure platform business, which includes switching, routing, wireless and data center. The unit, which accounts for the most significant share of Cisco's revenue, was down 1% for the first six months of the fiscal year.
"While I am happy to see good numbers from Cisco, I am not yet convinced this is evidence of a turnaround," O'Donnell said. "It still needs more time to get the company back into true growth mode."
Intent-based networking expected to boost Cisco revenue
An area of Cisco's infrastructure portfolio that showed promise last quarter was intent-based networking (IBN), which represents a new methodology that manages networks through policies and centralized software. The number of customers for Cisco's Catalyst 9000 campus switches -- introduced last summer with subscription-based IBN software -- doubled from the previous quarter to 3,100.
"This is the fastest-ramping new product introduction we've had in our history," Cisco CEO Chuck Robbins said during an earnings call with financial analysts.
Cisco reported a loss of $8.8 billion in net income due to a one-time charge related to the federal tax law passed by Congress in December. Without the additional cost, Cisco's profits were $3.1 billion, a 10% increase from a year ago.
Because of the law's corporate tax cut, Cisco plans to repatriate in the current quarter $67 billion parked in foreign banks. The company plans to spend the money on dividends paid to shareholders, stock buybacks and acquisitions. Cisco has bought 11 companies since January 2017.