Cisco Systems'
(
CSCO
) second quarter 2012 earnings (excluding one-time items and
including stock based compensation) beat the Zacks Consensus
estimate by 5 cents, or 13.2%. Revenue was more or less in line,
beating the consensus by 1.8%.
As in the past, estimate revisions were minimal prior to the
announcement of earnings, raising the Zacks Consensus estimate for
the quarter by a penny, flattish compared to the year-ago quarter
and easily exceeded by Cisco.
Revenue
Revenue of $11.53 billion was up 2.4% sequentially, 10.8% year
over year and better than management's expectations of a 4-6%
sequential decline.
Products, which generated 79% of revenue, did slightly worse
than services, growing 1.9% sequentially and 10.7% year over year.
Services accounted for the remaining 21%, up 4.6% sequentially and
11.0% year over year.
Cisco is seeing relatively stronger demand in the international
market. The EMEA region was the strongest in the last quarter,
growing 17.5% sequentially. The Asia/Pacific region was next,
growing 7.5%. However, Americas was soft, declining 5.5%. The Asia
Pacific saw the strongest growth from the year-ago quarter (14%).
The EMEA region grew 5%. The net increase in the Americas was a
mere 5%, indicating continued sluggishness in the doestic
market.
Product Revenue by Category
Switching revenue accounted for a 31% revenue share, declining
1.6% sequentially and increasing 8.3% year over year. Cisco stated
that the Nexus 2000 and 5000 lines saw over 100% growth over the
copmparable prior-year quarter.
The Nexus product line is largely dependent on the UCS platform,
which was up 91% year over year. Moreover, Cisco added 1,786 new
UCS customers during the quarter. Cisco's partnerships with
EMC Corp
(
EMC
) and
VMWare Inc
(
VMW
) are also helping results here.
Routers were 18% of total revenue, representing a sequential
decline of 1.5% and a year-over-year increase of 8.2%. The ASR edge
routers had another very strong quarter, as a result of UCS
deployments and greater adoption of cloud computing. Overall,
high-end routers grew 11% year over year, while mid-to-low-end
routers grew 6%. Cisco appears optimistic about market share gains
in this area.
Advanced Technologies (now christened New Products) generated
27% of revenue, up 8.0% sequentially and 23.0% year over year. All
the product lines within this category were up double-digits from
the year-ago quarter, with data center up the strongest (88.1%),
followed by wireless (24.8%), security (23.7%), service provider
video (23.0%) and collaboration (10.0%). All except collaboration
increased sequentially although data center was again the
strongest, growing 88.1%.
Other products brought in a little less than 3% of revenue, up
12.1% sequentially and down 31.2% year over year.
Orders
Cisco saw strong order growth in the last quarter, although
growth rates were slower than in the previous quarter. Global
orders increased 7% from the year-ago quarter. The Asia/Pacific was
the strongest with 14% growth, followed by the EMEA, which grew
around 7% and the Americas, which was up around 5%. However,
adjusting for the consumer video line of business, Americas revenue
would have been up 8%.
The emerging markets were a mixed bag in the last quarter, with
Russia, Brazil, Mexico and China growing 19%, 15%, 16% and 13%,
respectively. India remained weak, with continued issues in the
public sector, dragging revenue down 13%.
Cisco also saw strong growth in the U.K. and Canada, which grew
13% and 29%, respectively. Germany and France remained soft
however, declining 2% and 3%, respectively.
Despite pockets of weakness in some areas, orders were up across
most market segments. Enterprise and commercial were up 7% each,
followed by service provider, which was up 12%. Public sector
remained the weakest (down 1%).
Gross Margin
Cisco generated a gross margin of 61.9% in the last quarter,
flat sequentially but up 20 bps on a year-over-year basis. The
gross margin was negatively impacted by mix, pricing and discounts,
as offset by higher volumes and lower manufacturing costs.
The product gross margin of 60.0% was down 23 bps sequentially
and up 103 bps year over year. Competition has stiffened over the
past few months, increasing pricing pressure and forcing management
to offer heavy discounts. However, cost savings helped to offset
the impact.
The services gross margin of 66.3% was up 115 bps sequentially
and 148 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 initiations.
Operating Performance
Cisco's operating expenses of $4.22 billion were 1.3% higher
than the previous quarter's $4.17 billion. The operating margin was
25.3%, up 39 bps sequentially and 497 bps year over year. G&A
expenses increased significantly as a percentage of sales, with
both R&D and S&M declining.
Pursuant to the company's growth plans, management increased the
workforce by 400 in the last quarter, which followed an increase of
1,900 in the September quarter, 2,000 in the June quarter and 1,000
in the preceding quarter.
On a pro forma basis, Cisco generated a net income of $2.31
billion, or a 20.0% net income margin compared to $2.22 billion, or
19.7% in the previous quarter and $1.77 billion or 17.0% 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 $2.18 billion ($0.40 per share) compared to $1.78 billion ($0.33
per share) in the previous quarter and $1.52 billion ($0.27 per
share) in the prior-year quarter.
Balance Sheet
Cisco ended with a cash and investments balance of $46.7
billion, up $2.35 billion during the quarter. The company generated
$3.10 billion in operating cash flow, spent $284 million on capex,
$71 million on acquisitions net of cash and equivalents acquired,
$474 million on share repurchases and $322 million on dividends.
The net cash position at quarter-end was $29.84 billion, down from
$26.71 billion at the end of the fiscal first quarter. Including
short term debt and long term liabilities, the debt-cap ratio was a
mere 31.8%.
Inventories dropped 2.0% to $1.59 billion, with inventory turns
increasing from 10.2X to 11.0X. Days sales outstanding (DSOs) were
down from 38 to around 31.
Guidance
In the third quarter, Cisco expects revenue to be down 1% to up
1% on a sequential basis, or increase 5-7% on a year-over-year
basis. The non-GAAP gross margin is expected to be 61.5-62%,
non-GAAP operating margin to be 27-28% of revenue, a non-GAAP tax
rate of 22%, yielding a non-GAAP EPS of 45 to 47 cents. The GAAP
EPS is expected to be 7-10 cents lower than the non-GAAP EPS. The
Zacks Consensus estimate (includes stock based compensation) was 40
cents when the company reported, below the guided range.
Our Take
Cisco beat expectations on both the top and bottom lines and
guidance was also better than expected. It is apparent that the
company'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.
What remains a slight concern is the margin side, where the
company could be impacted by continued pricing pressure, as
competitors like
Hewlett Packard Company
(
HPQ
) and Chinese company Huawei have manufacturing operations in
low-cost countries, which make them more competitive.
The company is also keen on sacrificing margins for market share
gains. However, we think it would not be easy to dislodge Cisco,
which has already introduced more competitive switching products
and has been increasing headcount in emerging
countries.
The other thing impacting margins is the mix, which is currently
against the company given the growing adoption of UCS. However,
there is a longer-term positive here too. The growing installed
base could possible help Cisco sell higher-margin products more
easily at a later date.
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).
CISCO SYSTEMS (
CSCO
): Free Stock Analysis Report
EMC CORP -MASS (
EMC
): Free Stock Analysis Report
HEWLETT PACKARD (
HPQ
): Free Stock Analysis Report
VMWARE INC-A (
VMW
): Free Stock Analysis Report
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