Cisco rises on strong revenue guidance

Cisco shares rose as much as 3% after hours on Wednesday after the company reported better-than-expected earnings for the third quarter of its 2019 fiscal year, which ended on April 27, and strong revenue guidance.

Here are the key numbers:

• Earnings: 78 cents per share, excluding certain items, vs. 77 cents per share as expected by analysts, according to Refinitiv.
• Revenue: $12.96 billion, vs. $12.89 billion as expected by analysts, according to Refinitiv.

Revenue was up 4% year over year, according to a statement.

Cisco said it expects 4.5% to 6.5% revenue growth in its fiscal fourth quarter, and earnings of 80 cents to 82 cents per share. Analysts surveyed by Refinitiv were looking for $13.29 billion in revenue, or 3.5% revenue growth, and 81 cents per share.

CEO Chuck Robbins addressed the subject of how tariffs could affect Cisco’s business during a Wednesday conference call with analysts.

“We see very minimal impact this point based on all the great work the teams have done, and it is absolutely baked into our guide going forward,” Robbins said.

The majority of Cisco’s business comes from selling networking software and hardware, including switches and routers that are kept inside corporate data centers. This market is represented in Cisco’s Infrastructure Platforms business segment, which contributed $7.55 billion in revenue, beating the $7.46 billion consensus estimate among analysts polled by FactSet.

The company’s Applications business segment, which includes AppDynamics and conferencing products, generated $1.43 billion in revenue, lower than the $1.50 billion FactSet analyst estimate.

The Security business segment, featuring among things the recently acquired Duo Security, had revenue of $707 million, up 21% and above the FactSet estimate of $676 million.

Heading into the earnings report, some analysts suggested that Cisco is continuing to see strong results from its Catalyst 9000-series switches.

“We believe the Catalyst 9000 refresh remains in the early innings,” Nomura Instinet analysts led by Jeffrey Kvaal said in a note distributed to clients last week. “In our survey, we found that 11% of respondents have upgraded and 16% expect to do so in the next 12 months. This refresh is now nearly two years old. This suggests the refresh has yet to hit the steepest part of the adoption curve.”

This time last year, though, the Catalyst 9000 line was seeing a pickup in adoption, setting the stage for tough comparisons in the fiscal fourth quarter, Piper Jaffray analysts James Fish and Andrew Nowinski wrote in a note distributed to clients on Monday.

And Cisco’s conversations with customers around upgrading could open up the door for them to move to other vendors’ products.

“Both our CIO survey and calls indicate some discomfort with a price hike from Cisco – at least a perceived one,” the Nomura Instinet analysts wrote. Some customers are choosing to open up the refresh to bids from rival vendors. Others are using the perceived price hike and shift to software as a mechanism for reducing price on the traditional systems business. Both Juniper and Arista have indicated their enterprise businesses are growing faster than the overall market. “

There are also broader challenges for Cisco to confront.

“Public partners and results across public IT peers suggest a general Enterprise pause in spending at a minimum is occurring, if not a full Enterprise cycle slowdown,” Fish and Nowinski wrote.

In the fiscal third quarter Cisco saw enterprise revenue go up 9%, commercial revenue rise 5% and public sector revenue grow 10%. Service provider revenue fell 13% in that period. Robbins said the service provider category is the only one where he saw a change in economic conditions.

Cisco stock is up 15% since the beginning of 2019. In the fiscal third quarter Cisco announced initiatives with Alphabet’s Google Station Wi-Fi initiative and SoftBank.

WATCH: Watch CNBC’s full interview with Cisco CEO Chuck Robbins