Cisco Systems (
reported first quarter 2013 earnings of 44 cents (excluding
one-time items and including stock based compensation), which
beat the Zacks Consensus Estimate by 3 cents, or 7.3%. Revenue
was more or less in line with the consensus.
Revenue increased 5.5% year over year to $11.69 billion and
was better than management's expectations (up 2-4%). Products
(78.3% of total revenue) were up 3.9% year over year to $9.30
billion. Services (21.7% of total revenue) jumped 11.9% year over
year to $2.58 billion.
Revenue grew year-over-year across most of the geographies.
The Americas region (59.1% of total revenue) increased 6.6% year
over year, while Asia-Pacific, Japan and China collectively known
as APJC (16.9% of total revenue) surged 10.4% from the year-ago
quarter. Europe, Middle East and Africa (EMEA) remained flat on a
year over year basis during the quarter.
Product Revenue by Category
Switching (30.4% of total revenue), NGN Routing (17.3% of
total revenue) and Collaboration (8.6% of total revenue) segment
revenue declined 1.6%, 2.7% and 6.7% year over year,
respectively. Other revenue also declined 14.1% compared with the
However, this decline was fully offset by strong performances
from Service Provider Video (9.7% of total revenue), Wireless
(4.1% of total revenue), Data Center (61.0% to total revenue) and
Security (4.1% of total revenue) segments, which increased 30.6%,
34.3%, 61.0% and 5.6%, respectively.
Cisco's product orders in the quarter remained flat year over
year. The APJC region saw the strongest growth at 7%, with the
Americas growing 2% and EMEA declining 10% from the year-ago
quarter (consistent with broad market trends).
In the APJC region, India grew 50%, Japan was up in the
mid-single digits, while China remained flat compared with the
In the America region, Latin America grew 3.0%, primarily
driven by strong orders in Brazil (up 24.0%) and Mexico (up
11.0%), which fully offset a sluggish trend in Canada (down
12.0%) in the quarter.
Within the U.S., positive growth was noticed, with service
providers' order up 13.0%, enterprise up 9% and commercial orders
increasing 5.0%. However, federal government orders declined
15.0% from the year-ago quarter.
Russia and other emerging markets in the EMEA region remained
challenging, with enterprise declining in the mid-teens and
service provider declining in the high teens.
Cisco generated gross margin of 61.0% in the last quarter, up
40 bps sequentially but down 20 bps on a year-over-year basis.
Management has been strengthening its portfolio and improving
margins within each product category, which has enabled it to
generate strong margins overall.
Product gross margin of 59.7% was up 50 bps sequentially but
down 50 bps year over year. Services gross margin of 65.5% was
flat sequentially, while expanding 40 bps year over year.
Cisco's operating expenses of $4.41 billion were 3.0% lower
than $4.54 billion incurred in the previous quarter. Operating
margin was 23.8%, up 210 bps sequentially and 150 bps year over
Research and development expense ("R&D") increased 1.1%
sequentially while sales and marketing expense ("S&M")
remained flat sequentially. General and administrative expense
("G&A") decreased 21.2% sequentially. The 20 bps
year-over-year increase in cost of sales was fully offset by
declines of 20 bps, 150 bps and 20 bps in R&D, S&M and
G&A expenses, respectively.
On a pro forma basis, Cisco generated net income of $2.35
billion, or a 19.8% net income margin compared to $2.31 billion,
or 19.7% in the previous quarter and $2.07 billion or 18.4% net
income margin in the same quarter last year.
Our pro forma estimate for the last quarter excludes
restructuring charges, acquisition-related costs and intangibles
amortization charges on a tax-adjusted basis but includes stock
based compensation expenses. Our pro forma calculations may
differ from management's presentation due to the
inclusion/exclusion of some items that were not considered by
On a fully diluted GAAP basis, the company reported a net
income of $2.09 billion (39 cents per share) compared with $1.92
billion (36 cents per share) in the previous quarter and $1.78
billion (33 cents per share) in the comparable prior-year
Cisco ended with cash and investments balance of $48.7
billion, down $3.7 billion during the quarter. The company
generated $2.47 billion in operating cash flow and spent $1.00
billion on share repurchases and dividends. The net cash position
at quarter-end was $28.67 billion, compared with $32.39 billion
at the end of the fiscal fourth quarter.
For second quarter of fiscal 2013, Cisco expects revenue to
increase in the range of 3.5% to 5.5% on a year-over-year basis.
Non-GAAP gross margin is expected to be 61-62% and non-GAAP
operating margin is expected to be 26.5-27.5% of revenue. The
company expects a non-GAAP tax rate of 22%, yielding non-GAAP
earnings of 47 to 48 cents per share.
Cisco reported strong first quarter result and its outlook
remains positive. However, sluggish macro-environment is the
primary headwind going forward.
It is apparent that Cisco's strategy of pursuing opportunities
in international markets and focusing on new products and markets
is paying off. Cisco is already the best entrenched company
across the world and despite growing competition from several
smaller players; the company appears to be holding its own.
Additionally, the focus on new products resulted in continued
market share gains and margin expansion in the last quarter.
Order growth in the last quarter was quite encouraging and the
trend is reflective of Cisco's superior strategy and
Of course, competitors like
Hewlett Packard Company (
and the Chinese company Huawei have manufacturing operations in
low-cost countries, which make them more competitive. They are
also interested in sacrificing margins for market share gains.
This remains a major concern for Cisco in the near term.
Cisco shares therefore carry a Zacks #4 Rank, which translates
to a Sell rating in the near term (1-3 months). We remain Neutral
on a long term (3-6 month) basis.
CISCO SYSTEMS (CSCO): Free Stock Analysis
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