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Cisco (CSCO) Beats Earnings and Revenue Estimates in Q2

Cisco SystemsCSCO reported second-quarter fiscal 2016 earnings of 53 cents, which beat the Zacks Consensus Estimate of 44 cents. The adjusted earnings per share figure exclude one-time items but include stock-based compensation expenses.

During the quarter, Cisco announced its decision to raise the quarterly dividend by 5 cents to 26 cents per share. In addition, the company increased its stock buyback program by up to 15 billion shares. The company's total share repurchase program is now valued at approximately $16.9 billion.

Following the announcement, Cisco's shares gained more than 7%. Also, strong profitability and operating leverage led to the rally.

Revenues

Revenues decreased 6% sequentially and 0.1% year over year to $11.9 billion but came slightly above the Zacks Consensus Estimate of $11.8 billion.

On a year-over-year basis, products (75% of total revenue) were down 1% to $9.0 billion but Services (25%) rose 3% to $2.9 billion. Product book-to-bill ratio was approximately 1.

Product Revenues by Category

Sequentially, all the product categories decreased, except NGN Routing and Other Products.

NGN Routing (15%) and Other Products (1%) segments increased 2.9% and 2.7%, respectively, on a sequential basis.

However, this increase was offset by sequentially weak performance by Switching (29%), Collaboration (9%), Data Center (7%), Service Provider Video (6%), Wireless (5%) and Security (4%) which declined 13.4%, 8.6%, 4.3%, 22.1%, 5% and 4.7%, respectively.

Revenues by Geography

On a sequential basis, revenues from Europe, Middle East and Africa (EMEA) remained flat, Asia-Pacific, Japan and China (collectively known as APJC) improved 7.3%, while the Americas declined 11.4%.

Gross Margin

Pro-forma gross margin was 63.3%, up 59 basis points (bps) sequentially and 199 bps year over year.

Cisco's operating expenses of $4.2 billion decreased 5.8% sequentially and 1% year over year. As a percentage of sales, all the three expenses - research & development, sales & marketing expenses as well as general & administrative - decreased year over year. The net result was an operating margin of 28.2%, down 4.2% sequentially but up 8.9% year over year.

Net Income

On a GAAP basis, Cisco recorded a net profit of $3.1 billion or 62 cents per share compared with $2.4 billion or 46 cents last year. On a pro-forma basis, the company generated adjusted net profit of $3.11 billion as against $2.58 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 $60.4 billion as against $59.1 billion in the prior quarter. Trade receivables were $4.3 billion, down from $4.7 billion in the earlier quarter. Total debt (short-term and long-term) was $24.6 billion, flat sequentially.

The company generated operating cash flow of $3.9 billion and spent $0.3 billion on capital expenditure, netting a free cash flow of $3.6 billion.

Share Repurchase & Dividend

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

The company bought back approximately 48 million shares under the repurchase program at an average price of $26.12 a share or a total of $1.3 billion.

Guidance

For the third quarter of fiscal 2016, Cisco expects revenues to increase in the range of 1% to 4% on a year-over-year basis. This guidance excludes the contribution from the SP Video CPE Business. On a non-GAAP basis, gross margin is expected within 62.5-63.5% and operating margin in the range of 28.5-29.5% of revenues. The company expects non-GAAP tax rate of 22%, yielding non-GAAP earnings per share of 54 cents to 56 cents. The Zacks Consensus Estimate is pegged at 51 cents.

Our Take

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

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 completed a few acquisitions including Portcullis, ParStream and Lancope, increasing its share in security, data analytics and video markets. The company also announced its plans to acquire Santa Clara-based start-up Jasper Technologies Inc. for $1.4 billion in cash to penetrate further into the Internet of Things (IoT) space. The deal will simplify the main aspects of IoT for Cisco customers, i.e. connecting and securing devices on a global scale while collecting and analyzing the data they generate, thereby driving growth.

Moreover, continued share buybacks and dividend hikes will inspire investors' loyalty.

However, weakness in a few emerging markets, slower growth across various product categories and weak macro environment 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 QLogic Corp. QLGC . All the three 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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