Cisco drops despite earnings beat

  • Cisco beat estimates on earnings and revenue, with guidance in line.
  • The company's success with its latest data center switches continued in the quarter, analysts said.
Chuck Robbins, CEO of Cisco
Ashlee Espinal | CNBC
Chuck Robbins, CEO of Cisco

Cisco stock fell more than 4 percent in after-market trading on Wednesday after the company reported better-than-expected earnings for its fiscal third quarter, which ended on April 28.

  • Earnings: 66 cents per share, excluding certain items, vs. 65 cents per share as expected by analysts, according to Thomson Reuters
  • Revenue: $12.46 billion, vs. $12.43 billion as expected by analysts, according to Thomson Reuters

With respect to guidance for the fiscal fourth quarter, Cisco said in a statement that it expects 68 to 70 cents in earnings per share, excluding certain items, on 4 to 6 percent revenue growth, which comes out to $12.62 billion to $12.86 billion in revenue. Analysts had expected 69 cents in earnings per share, excluding certain items, and $12.73 billion in revenue, according to Thomson Reuters.

The company's services business segment produced $3.16 billion in revenue, below the FactSet consensus estimate of $3.23 billion, according to StreetAccount.

Three of Cisco's four product categories surpassed estimates, though. The most important, the Infrastructure Platforms segment, which includes data-center networking switches, had $7.16 billion in revenue, above the FactSet consensus estimate of $7.14 billion, StreetAccount said.

Cisco "continues to achieve success" in selling its Catalyst 9000 switches, and the fact that they require customers to also buy software licenses supports the company's transition toward a larger focus on software, Raymond James analysts led by Simon Leopold wrote in a May 10 note.

Cisco will introduce more software services, including in association with routing products, CEO Chuck Robbins told analysts on the company's earnings call with analysts on Wednesday.

"It will create short-term headwinds, but we think long-term for the business, it's absolutely the right thing to do," Robbins said.

The Other Products segment missed expectations, with $249 million in revenue, below the $253 million consensus estimate. Revenue in that category was down 6 percent, Cisco said.

Daniel Flax, senior research analyst at Neuberger Berman, said the stock may be selling off because it's done very well this year.

"Cisco is continuing to drive its mix towards more software and services. This is leading to an increase in recurring revenue and really making the business a lot more durable than it has been historically," Flax said on "Closing Bell."

Couple that with the fact that the company is leading solutions in areas such as security and is returning a significant amount of capital to shareholders, Flax says, and "it's a good story over the medium to long term."

In the fiscal third quarter Cisco announced a TV dongle for screen sharing and said it plans to work with the Saudi Telecom Company on the development of 5G mobile networks.

More recently, Cisco announced the sale of its Service Provider Video Software Solutions business to Permira. Terms weren't disclosed, although Bloomberg said Permira paid $1 billion.

Cisco isn't seeing improvement in the service provider video business or in its data center routing business, and the fourth-quarter guidance reflects those observations, chief financial officer Kelly Kramer said on the earnings call.

Piper Jaffray analysts James Fish and Andrew Nowinski said in a note last week that Cisco could opt to use the proceeds from the Permira deal for a larger share buyback or for acquisitions. "With recent announcements from VMware driving an increasing competitive environment against Cisco, we believe the strategic rationale for Cisco to potentially acquire Nutanix has increased to better compete with VMware," the analysts wrote.

In the quarter, Cisco repatriated $67 billion to the U.S. and made a $1.3 billion one-time foreign tax payment tied to recently enacted U.S. tax reform, Kramer said on the call.

Cisco stock has risen 17 percent since the beginning of the year.

— Michelle Fox contributed to this story.