Networking equipment and software provider Cisco Systems (NASDAQ: CSCO – $49.21) reported strong fiscal second quarter results that were a penny higher than Street views. Total revenue of $12.4 billion grew 7% year-over- year, also beating estimates of $12.42 billion. Product sales increased 9%, while service revenue rose 1%. Product orders increased 8% and acquisitions benefited the top line by 140 basis points. Core infrastructure sales jumped 6%. The switching category was particularly strong, growing at a double-digit pace thanks to strong demand from enterprises and the flagship Catalyst 9000 product line. The wireless business also had double-digit growth, on strength from Wave and Meraki products. There were some pockets of weakness, however, with routing down owing to less service provider activity and a decline in data center servers. Taking a look at some of Cisco’s smaller units, Application revenue grew an impressive 24%, thanks to solid demand for Unified Communications, TelePresence, and AppDynamics products. Finally, the Security division gained 18%, the fastest growth seen in multiple years.
The company continues to make progress transitioning to a more software-centric business model. Indeed, software subscriptions were 65% of total software revenue, up 10 percentage points from last year. Software as a percentage of total revenue is expected to grow from the current 22% to 30% over the next three years. Sales to enterprises increased 11%, small and mid-sized business sales rose 7%, service provider was down 1%, and the public sector grew a solid 18%.
The company said it increased the quarterly dividend to $0.35 per share, up 6% year-over-year and yielding 2.8% on an annualized basis. The company also announced a $15 billion increase in its share repurchasing program, which now stands at $24 billion. Looking ahead at the third quarter, management is calling for revenue to grow 4% to 6% and adjusted earnings per share are expected to range from $0.76 to $0.78, in line with analysts’ estimates of $0.77. It’s quite clear that Cisco is firing on all cylinders. What’s encouraging is that strength is being driven by best-in-class technology and pristine execution. Shares can continue to be considered for conservative income accounts.