Cisco Gives Bullish Outlook Helped by New Products, Software

Ian King (Bloomberg) -- Cisco Systems Inc. gave a bullish forecast for the current quarter, boosted by corporate spending on upgrades to computer networks.

Sales in the fiscal first quarter will grow 5 percent to 7 percent from the same period a year earlier, the San Jose, California-based company said Wednesday in a statement. That indicates sales of as much as $12.98 billion, compared with an average analyst estimate of $12.59 billion. Adjusted profit in the quarter ending in October will be 70 to 72 cents a share, the company said. Analysts predicted 69 cents.

Chief Executive Officer Chuck Robbins is remaking Cisco into a provider of networking software and services. At the same time, the company is trying to decrease its traditional dependence on high-priced custom machines that direct the majority of the world’s internet data traffic. That push is paying off with an increasing backlog of deferred revenue. In the near term, a buoyant economy is encouraging companies to update or enlarge their corporate infrastructure and helping bolster Cisco’s traditional business.

The shares closed at $43.86 in regular trading in New York leaving the stock up 15 percent this year. The shares rose about 5 percent in extended trading.

Cisco reported revenue from all regions and all of its major product areas grew in the fiscal fourth quarter from a year earlier. Its hardware division had sales of $7.44 billion, up 7 percent. Software rose 10 percent to $1.34 billion and security revenue gained 12 percent at $627 million. By region, Americas, the biggest source of sales, had the slowest growth at 5 percent. Europe, Middle East and Africa sales were up 8 percent and Asia had 6 percent growth.

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“They’re looking for 5 to 7 percent which is arguably better than they’ve seen for a long time,” said Erik Suppiger, an analyst at JMP Securities. “It’s good on an overall basis. It’s encouraging.”

Suppiger said investors want more of the company’s growth in the future to come from software and services. Growth from its hardware business, boosted by a stronger economy, is ‘‘not what we want ultimately,” he said.

Cisco reported progress in reducing its dependence on hardware, with deferred revenue from software and subscriptions increasing 23 percent to $6.1 billion in the quarter.

While Cisco is plowing ahead with an attempt to turn itself into a different company -- 19 of 20 acquisitions made since the start of 2016 were software companies, according to Raymond James analyst Simon Leopold -- it still gets the majority of its income from switches and routers.

The market for those boxes that connect computers together to form networks and link those networks to the broader internet is changing away from what made Cisco dominant in the industry. Customers increasingly want cheaper hardware and software that’s open and programmable. The company, which in 1999 briefly became the world’s most valuable company, is also trying to field new, more flexible boxes that meet those requirements.

To compensate for that shift to cheaper machinery, Cisco’s new products help customers better monitor data traffic, control user access, and diagnose and fix problems. Many of them are offered as subscriptions, which tie customers to the company over a longer period.

In the three months ended July 28, Cisco reported adjusted profit of 70 cents a share, on revenue of $12.84 billion. That compares with average analyst estimates of 69 cents a share and sales of $12.8 billion. Sales grew about 6 percent from a year earlier, the third consecutive quarterly expansion. Prior to that Cisco had reported lower revenue for seven straight quarters.