) third quarter 2012 earnings (excluding one-time items and
including stock based compensation) beat the Zacks Consensus
estimate by 5 cents, or 12.7%. Revenue was more or less in line
with the consensus.
Revenue of $11.59 billion was flat sequentially, up 6.6% year
over year and better than management's expectations of a 5-7%
Products, which generated 79% of revenue, came in flat
sequentially and up 5.0% year over year. Services accounted for the
remaining 21%, up 3.0% sequentially and 13.0% year over year.
Cisco is seeing relatively stronger demand in the
Asia/Pacific/Japan/China region, revenue from which grew 15.0%
sequentially. Revenue from the regaion has grown very strongly over
the past year from $1.82 billion to $2.25 billion.
The Americas also increased 6% sequentially and 3.0% from the
year-ago quarter. The EMEA region tumbled 7.2% sequentially, after
growing 17.5% in the fiscal second quarter, as enterprise customers
turned cautious, according to management. However, revenues
continued to increase on a year-over-year basis.
Product Revenue by Category
Switching revenue accounted for a 31% revenue share, flat
sequentially and increasing 4.7% year over year. Management
provided encouraging commentary about the business, stating that
the modular business was quite strong in the last quarter and that
the Nexus 2000 and 5000 lines saw over 75% growth over the
copmparable prior-year quarter. The Nexus product line is largely
dependent on the UCS platform (UCS servers jumped 57% from a year
Routers accounted for 19% of total revenue, increasing 3.2%
sequentially, while staying flat on a year-over-year basis. The ASR
edge routers had another very strong quarter, as a result of UCS
deployments and greater adoption of cloud computing. The ASR 9000
routers in particular were up over 90%. The high-end routers had a
strong quarter, with the next generation category flattish and
optical down on a sequential basis.
New Products generated 27% of revenue, down 2.4% sequentially
and up 11.7% year over year. All except the collaboration product
line within this category were up from the year-ago quarter, with
data center up the strongest (68.2%), followed by wireless (20.4%),
service provider video (up 11.6%) and security (9.2%). Security and
wireless also grew on a sequential basis.
Cisco saw a 4% year-over-year increase in orders compared to a
7% increase in the fiscal second quarter, indicating slower end
markets. The APJC region saw the strongest growth at 7%, with the
Americas growing orders 5% and EMEA coming in flat with the
The emerging markets were a mixed bag in the last quarter, with
Japan and Russia growing 39% and 22%, respectively. China was down
8%. India too remained weak, with continued issues in the public
Russia was the lone bright spot in Cisco's EMEA business, with
problems in Southern Europe exanding and Central and Northern
Europe also remaining weak.
The weakness was most pronounced in the enterprise segment,
which saw orders declining 1% from last year. Other segment, such
as public sector, service provider and commercial were up 3%, 5%
and 8%, respectively.
Cisco generated a gross margin of 62.8% in the last quarter, up
83 sequentially but down 56 bps on a year-over-year basis. The
gross margin benefited from mix and higher-ASP new products.
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 60.9% was up 90 bps sequentially and
52 bps year over year. Competition remains stiff, increasing
pricing pressure and forcing management to offer heavy discounts.
However, cost savings helped to offset the impact.
The services gross margin of 65.5% was down 78 bps sequentially
, while increasing 56 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.
Cisco's operating expenses of $4.29 billion were 1.5% higher
than the previous quarter's $4.22 billion. The operating margin was
25.8%, up 46 bps sequentially and 197 bps year over year. The
sequential increases of 10 bps and 48 bps in R&D and G&A
expenses, respectively were offset by the 83 bp and 21 bp declines
in cost of sales and S&M, respectively.
Compared to the year-ago quarter, R&D and S&M expenses
declined 144 bps and 195 bps, respectively, while cost of sales and
G&A increased 56 bps 85 bps, respectively.
On a pro forma basis, Cisco generated a net income of $2.52
billion, or a 21.8% net income margin compared to $2.31 billion, or
20.0% in the previous quarter and $2.10 billion or 19.3% 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
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 $2.34 billion ($0.43 per share) compared to $2.18 billion ($0.40
per share) in the previous quarter and $1.84 billion ($0.33 per
share) in the prior-year quarter.
Cisco ended with a cash and investments balance of $48.4
billion, up $1.67 billion during the quarter. The company generated
$2.97 billion in operating cash flow, spent $281 million on capex,
$224 million on acquisitions net of cash and equivalents acquired,
$513 million on share repurchases and $432 million on
The net cash position at quarter-end was $32.04 billion, down
from $29.84 billion at the end of the fiscal second quarter.
Including short term debt and long term liabilities, the debt-cap
ratio was a mere 30.7%.
Inventories dropped 5.8% to $1.50 billion, with inventory turns
increasing from 11.0X to 11.5X. Days sales outstanding (DSOs) were
flat at around 31.
In the fourth quarter, Cisco expects revenue to be down 1.5% to
up 1.4% on a sequential basis, or increase 2-5% 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 44 to 46 cents.
The GAAP EPS is expected to be 7-11 cents lower than the
non-GAAP EPS. The Zacks Consensus estimate (including stock-based
compensation) was 43 cents when the company reported, below the
Cisco beat expectations on both the top and bottom lines, but
both the guidance and management commentary was indicative of a
slowing down in its business, at least in the current quarter. Most
disappointing was the order performance, which given Cisco's
relatively short lead times is indicative of a weak fourth
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 margin expansion in the last
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
keen on sacrificing margins for market share gains.
While this is unlikely to dislodge Cisco, which has already
introduced more competitive switching products and has been
increasing headcount in emerging countries, there is likely to be a
continued negative impact on margins stemming from discounts and
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. Any
weakness in the next quarter is more or less priced into the
shares, given their 12.6% decline in after-market trade
Cisco shares therefore carry a Zacks Rank of #3, which
translates to a Hold rating in the near term (1-3 months). We are
also Neutral on a long term basis.
CISCO SYSTEMS (CSCO): Free Stock Analysis
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