Cisco Impresses, Shares Slightly Rich

The company posted double-digit annual growth within its applications and security segments and in line with our projections. An unexpected positive was the 7% revenue gain within infrastructure systems, Cisco's largest operating segment. The company is benefiting from enterprises desiring a unified networking experience between on-premises, private and public clouds. Cisco's strategic focus of providing software, with analytics and security focused on cloud environments, is supplementing its industry-leading hardware. Customers find value in Cisco's ability to simplify the potential complexities in multi-cloud networking environments. Commodity components caused Cisco gross margins to decrease by 100 basis points to 62% for fiscal 2018 while operating margins declined to 25.7% from 26.5% due to increased operating expenses as Cisco invests in new product platforms.

The company's guidance of a 5%-7% year-over-year revenue increase for next quarter was higher than expected and drove the stock up 6% afterhours. We believe that Cisco will continue to repurchase shares while also increasing its dividend to $1.40 per share in fiscal 2019. Cisco is growing its main business units in a competitive environment, and we reiterate our thesis that Cisco's largest advantages may be its ability to sell an entire networking solution whereas competitors can only offer partial solutions.

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