Morningstar | CSCO Updated Forecasts and Estimates from 27 Nov 2018
Cisco's first-quarter results modestly beat our top line and net income expectations while the $0.77 earnings per share exceeded our expected result due to an increased quantity of shares repurchased. The narrow-moat firm posted 8% year-over-year revenue growth, with strength across all the business segments and provided strong guidance for the next quarter. After updating our Cisco forecast to consider stronger growth driven by expected cross selling of multi-cloud environment products, security solutions, and infrastructure hardware, we are raising our fair value estimate to $46 per share from $43. With shares trading around our fair value estimate after hours, we recommend for investors to sustain their Cisco positions.The company guided the second quarter to have a 5%-7% growth over the previous year with 30.5%-31.5% non-GAAP operating margins. Cisco is benefitting from a strong IT spending environment, and we believe that the company's product roadmap has made the it a one-stop-shop for networking environments. Two major recent announcements by Cisco were its integration of security into SD-WAN products and its offering of production grade Kubernetes to be run on premises and then offloaded to Amazon AWS. We like that Cisco is intertwining previously siloed offerings into combined solutions that contain unique selling features. Additionally, having support with all three major hyperscale public cloud providers allows Cisco to be a commonality for IT teams balancing on-premises, private, and public cloud environments. We like that Cisco has completely embraced the cloud as a path to growth instead of a business threat. In our view, Cisco's innovative product portfolio should keep it on the shortlist for enterprise customers debating networking infrastructure providers for hardware, software, and services in cloud environments or on premises.
The infrastructure platforms business (switches, routers, data center, and wireless) grew by 9% and applications (collaboration, Internet of Things, analytics, other) increased by 18% compared with last year. The security business grew by 11% year over year, and software subscriptions grew to be 57% of total software revenue compared with 52% the prior year. Software subscriptions are growing due to Cisco's product portfolio shifting to a subscription-based sales model from a perpetual license approach. Cisco's investments in cloud-based offerings, software, and security is paying dividends, and we also note that its hardware products grew across the board.
Switches experienced growth in both the campus and data center markets. We also note that Cisco's recently announced 400Gb switches that will target the hyperscale cloud providers as well as financial institutions and service providers. In our view, Cisco has showcased a faster hardware innovation cycle than when it lagged the 100Gb switch market, and this should help it compete against Arista's innovation. The routing business returned to growth due to service provider demand, which we believe is related to 5G network rollouts.
Cisco provided shareholders with $5 billion of share buybacks and $1.5 billion in dividends. We expect the company to remain committed to returning cash to shareholders, but we believe the company frontloaded its fiscal 2019 buyback plan.
Cisco Systems designs and sells a range of technologies that power the Internet. The company's business is organized into the following three geographic segments: Americas; Europe, Middle East, and Africa; and Asia Pacific, Japan, and China. The company's products and technologies are grouped into the following categories: Infrastructure Platforms; Applications; Security and Other Products. In addition to its product offerings, the company provides a range of service offerings, including technical support services and other services. The company delivers its technologies through software and services. The company's customers include businesses of all sizes, public institutions, governments, and service providers.
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