) fourth quarter 2012 earnings (excluding one-time items and
including stock based compensation) beat the Zacks Consensus
estimate by 3 cents, or 7.8%. Revenue was more or less in line with
Revenue of $11.69 billion grew less than 1% sequentially, but
was up 4.4% year over year and better than management's
expectations of roughly flat sequentially (or +/-1.5%).
Products, which generated 78% of revenue, came in flat
sequentially and were up 2.6% year over year. Services accounted
for the remaining 22%, up 2.3% sequentially and 11.7% year over
Revenue declined sequentially and grew year-over-year across all
geographies. The Americas region (57% of total revenue) was
generally steady with EMEA (27%) seeing some significant changes,
followed by Asia (remaining 16%), which saw the greatest sequential
decline and year-over-year increase.
The three regions declined 2.9%, 4.8% and 19.4%, respectively
from the previous quarter and were up 1.7%, 5.7% and 10.9%,
respectively from last year. The weakness in Southern and Central
Europe impacted Cisco in the same way that it has impacted other
companies with significant exposure to Europe.
Product Revenue by Category
Switching revenue accounted for a 31% revenue share, down 1.1%
sequentially and flat year over year. This was a mixed quarter for
Cisco, with the 3% year-over-year increase in fixed switching more
than offset by the 7% decline in modular switching.
Management commentary indicates that the trend remains positive,
with customers largely shifting fixed switching requirements to the
new Nexus 2000 and 5000 product lines. These products grew 24% from
last year (much weaker than in the last quarter), driven primarily
by data center build-outs. The modular side is also moving to Nexus
7000 as planned (the product line grew 13% in the last
Routers accounted for 18% of total revenue, down 2.1%
sequentially and up 3.9% on a year-over-year basis. The growth from
last year is encouraging, although sequential declines indicate
that the broad-based weakness in the market is also impacting
If the market doesn't turn around quickly, it could be hard to
sustain this growth. Cisco's growth in the last quarter is
attributable to market share gains, which management says came from
both the core and edge. The ASR routers had another very strong
quarter, with ASR 5000 up 67% and ASR 9000 up 97%.
New Products generated 28% of revenue, up 4.7% sequentially and
6.9% year over year. The wireless and data center segments of this
business were extremely strong in the last quarter. The 16.2%
sequential and 22.0% year-over-year growth in the wireless business
was the combined effect of successful new products (AP3600 for
instance) and Cisco's bundling startegy.
The data center business grew 42.6% sequentially and 89.5% from
last year. Here too, there were multiple drivers, the first being
Cisco's UCS system, which saw orders growing 58% and the second
being the transition to
) Romley, which also spurred demand for additional networking
Security also did well, though not as well as the first two,
mainly because the 15% increase in Cisco's networking security
revenues were partially offset by a 10% decline in content security
(compared to last year). Collaboration and service provider video
were the weak links, declining 1.5% and 4.0%, respectively from the
previous quarter and 7.8% and 2.0%, respectively from last
Cisco saw a 2% year-over-year increase in orders compared to a
4% increase in the fiscal third quarter, similar to the trend in
the last quarter and indicating slower end markets. The APJC region
saw the strongest growth at 12%, with the Americas growing orders
4% and EMEA declining 6% from the year-ago quarter (consistent with
broad market trends).
Australia was the strongest market in the APJC region (up 30%
from last year). China (up 17%) and Japan (up 12%) also remained
good growth markets. India on the other hand, remains sluggish.
Russia and other emerging markets in the EMEA region were both
up 12%, but this was offset by declines in other parts of Europe
(Italy 24%, U.K. 13%, France 12% and Germany 4%). The enterprise
segment in Europe managed to fight the odds (growing 2%), offset by
declines of 15% and 13% in service provider and public sector
segments. Commercial on the other hand was consistent with the
Within the U.S., the story appears very different. Not only did
the state and local government business grow for yet another
quarter, but growth rates accelerated from 7% in the third quarter
to 17% in the fourth. At the federal level however, the business
decline went from 8% to 11%. The 29 largest enterprise accounts
grew double-digits in the last quarter, following a double-digit
decline in the third, taking the overall growth in enterprise from
1% to 4%. Growth in commercial went from 6% to 7%.
Cisco generated a gross margin of 61.4% in the last quarter,
down 134 bps sequentially and 76 bps on a year-over-year basis.
Pricing and mix were the main negatives for the quarter, although
higher warranty expense also pushed up the total manufacturing
cost. Management has been strengthening its portfolio and improving
margins within each product category, which has enabled it to
generate the strong margins.
The product gross margin of 59.2% was down 163 bps sequentially
and 64 bps year over year. The services gross margin of 65.5% was
flat sequentially, while declining 129 bps year over year. The
sequential variation in services gross margins is attributable to
the mix of business (higher-cost advanced versus lower-cost
technical support), as well as the timing of contract
Cisco's operating expenses of $4.34 billion were 1.1% higher
than the previous quarter's $4.29 billion. The operating margin was
24.3%, down 141 bps sequentially and up 260 bps year over year. All
except G&A expenses increased sequentially as a percentage of
sales. The 76 bp year-over-year increase in cost of sales was
offset by declines of 114 bps, 183 bps and 39 bps in R&D,
S&M and G&A, respectively.
On a pro forma basis, Cisco generated a net income of $2.31
billion, or a 19.7% net income margin compared to $2.52 billion, or
21.8% in the previous quarter and $1.92 billion or 17.2% 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 management.
On a fully diluted GAAP basis, the company reported a net income
of $1.92 billion ($0.36 per share) compared to $2.34 billion ($0.43
per share) in the previous quarter and $1.23 billion ($0.22
per share) in the comparable prior-year quarter.
Cisco ended with a cash and investments balance of $48.7
billion, up $304 million during the quarter. The company generated
$3.08 billion in operating cash flow, spent $296 million on capex,
$42 million on acquisitions net of cash and equivalents acquired,
$1.89 billion on share repurchases and $425 million on
The net cash position at quarter-end was $32.39 billion,
relatively flat with the $32.04 billion at the end of the fiscal
third quarter. Including short term debt and long term liabilities,
the debt-cap ratio was a mere 30.7%.
Inventories grew 11.1% to $1.66 billion, with inventory turns
dropping from 11.5X to 10.8X. Days sales outstanding (DSOs) went up
from 31 to 34.
In the first quarter of fiscal 2013, Cisco expects revenue to be
flat to be down 1.8% on a sequential basis, or increase 2-4% on a
year-over-year basis. The non-GAAP gross margin is expected to be
61-62%, non-GAAP operating margin to be 26.5-27.5% of revenue, a
non-GAAP tax rate of 22%, yielding a non-GAAP EPS of 45 to 47
cents. The Zacks Consensus estimate (includes stock-based
compensation) was 46 cents when the company reported, within the
The NDS acquisition is expected to have a 50 bp negative impact
on the operating margin but not affect the guidance in any other
Acquisitions are expected to make a $1-1.1 billion contribution
to total revenue and a 3 cent contribution to the EPS for fiscal
Cisco missed estimates for the fourth quarter, but the guidance
was in line with expectations. The slowing down in its business is
not surprising and in line with global trends. Despite its size and
maturity, Cisco continues to grow in an environment that is
conducive to smaller and more nimble players.
It is apparent that Cisco's strategy of pursuing opportunities
in international markets and focus 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 very encouraging and the trend is
reflective of Cisco's superior strategy and innovative prowess.
Of course, competitors like
Hewlett Packard Company
) and 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. We doubt
that this would be enough to dislodge Cisco, which has already
introduced more competitive switching products and has been
increasing headcount in emerging countries.
All things considered, we think that Cisco is a very strong
company with significant market share and customer clout that would
generate solid results as the economy continues to improve.
Cisco shares therefore carry a Zacks Rank of #2, which
translates to a Buy 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
HEWLETT PACKARD (HPQ): Free Stock Analysis
INTEL CORP (INTC): Free Stock Analysis Report
To read this article on Zacks.com click here.