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Cisco (CSCO) Beats Earnings and Revenue Estimates in Q1

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Cisco SystemsCSCO reported first-quarter fiscal 2016 earnings of 54 cents, which beat the Zacks Consensus Estimate by 3 cents. The adjusted earnings per share figure excludes one-time items but includes stock-based compensation expenses.

Nevertheless, Cisco's shares plunged 5.1% due to weaker-than-expected revenue and earnings guidance for the upcoming quarter.

Revenues

Revenues decreased 1.3% sequentially but increased 3.6% year over year to $12.7 billion and came slightly above the Zacks Consensus Estimate of $12.6 billion. The healthy growth in several product lines led to the improvement.

On a year-over-year basis, products (78% of total revenue) were up 4.3% to $9.8 billion and Services (22%) rose 1% to $2.8 billion. Product book-to-bill ratio was below 1.

Product Revenues by Category

Switching (32%), Collaboration (9%), Security (4%) and Other Products (1%) segments increased 8.1%, 2.5%, 4.5% and 27.1%, respectively, on a sequential basis.

However, this increase was offset by sequentially weak performance by NGN Routing (14%), Data Center (7%), Service Provider Video (7%), Wireless (5%), and Service (22%) which declined 10%, 2.4%, 14.5%, 9.8% and 3.2%, respectively.

Revenues by Geography

Revenues decreased sequentially across all geographies. Europe, Middle East and Africa (EMEA) declined 0.7%, Asia-Pacific, Japan and China (collectively known as APJC) was down 7% while the Americas dipped 0.03%.

Orders

Though management did not provide much detail about orders, CEO Chuck Robbins stated that order growth was hit by "uncertainty of the macro environment".

Gross Margin

Pro-forma gross margin was 62.8%, up 111 basis points (bps) sequentially but flat year over year.

Cisco's operating expenses of $4.5 billion decreased 2.3% sequentially and 1.1% year over year. Research & development as well as sales & marketing expenses decreased slightly, as a percentage of sales, from the year-ago quarter, while general and administrative expenses increased marginally. The net result was an operating margin of 27.7%, up 4.3% sequentially and 9.6% year over year.

Net Income

Cisco Systems Inc. - Earnings Surprise | FindTheBest

On a GAAP basis, Cisco recorded a net profit of $2.4 billion or 48 cents per share compared with $1.8 billion or 35 cents last year. On a pro-forma basis, the company generated adjusted net profit of $2.75 billion as against $2.51 billion a year ago.

Our pro-forma figure excludes certain one-time items but includes stock-based compensation expenses.

Balance Sheet

Cisco exited the quarter with cash and investments balance of $59.1 billion as against $60.4 billion in the prior quarter. Trade receivables were $4.7 billion, down from $5.3 billion in the earlier quarter. Total debt (short-term and long-term) was $24.6 billion compared with $25.4 billion last quarter.

The company generated operating cash flow of $2.8 billion and spent $0.3 billion on capital expenditure, netting a free cash flow of $2.5 billion.

Share Repurchase & Dividend

During the quarter, Cisco paid $1.1 billion as dividend.

The company bought back approximately 4.5 billion shares under the repurchase program at an average price of $20.92 a share or a total of $93.9 billion.

Guidance

For the second quarter of fiscal 2016, Cisco expects revenues to increase in the range of 0% to 2% on a year-over-year basis. On a non-GAAP basis, gross margin is expected within 62-63% and operating margin in the range of 28.5-29.5% of revenues. The company expects non-GAAP tax rate of 23%, yielding non-GAAP earnings per share of 53 cents to 55 cents. The Zacks Consensus Estimate is pegged at 50 cents.

Our Take

Despite intensifying competition from several smaller players, Cisco remains strong in its domain. The company reported decent first-quarter results with both the top line and the bottom line exceeding the respective Zacks Consensus Estimate.

However, the company gave a weak guidance due to unfavorable exchange rates across the Asia-Pacific region and weak spending environment in China.

Cisco's strategy of diversifying its business by introducing software-based networking tools and security services, and relying less on specialized routers and switching equipment appears to be yielding results.

During the quarter, Cisco acquired cloud-based security provider, OpenDNS. This will help the company to enhance cloud security offerings by leveraging increased visibility and threat awareness offered by OpenDNS' cloud delivered platform. Also, the company's partnership with Apple, Inspur and Ericsson will drive growth.

However, weakness in a few emerging markets and slower growth across various product categories could impact profitability in the near term.

Cisco carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Extreme Networks Inc. EXTR , Netgear Inc. NTGR and Lantronix, Inc. LTRX . All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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