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Cisco (CSCO) Reports In-Line Q3 Earnings; Beats Revenues - Analyst Blog

Cisco SystemsCSCO reported third-quarter fiscal 2015 earnings of 48 cents, which were in line with the Zacks Consensus Estimate. The adjusted earnings per share exclude one-time items but include stock-based compensation expenses.

Revenues

Revenues increased 1.7% sequentially and 5.1% year over year to $12.13 billion and beat the Zacks Consensus Estimate of $12.04 billion.

On a year-over-year basis, products (77% of total revenue) were up 5.7% to $9.3 billion and Services (23%) rose 3.2% to $2.8 billion. Product book-to-bill ratio was greater than 1.

Product Revenues by Category

NGN Routing (16%) and Service Provider Video (8%) increased 13.3% and 17.8%, respectively, on a sequential basis.

However, this increase was offset by weak performance in Switching (29%), Collaboration (8%), Data Center (7%), Security (3%), Service (23%) and Other Products segments which declined 1.5%, 1.7%, 5.3%, 1%, 1.6% and 5.1%, respectively, from the last quarter. However, wireless (5%) remained flat sequentially.

Revenues by Geography

Revenues increased sequentially across all geographies. On a sequential basis, Europe, Middle East and Africa (EMEA) increased 0.9%; Asia-Pacific, Japan and China (collectively known as APJC) improved 1.3% and the Americas increased 2.1%.

Orders

Cisco's total product orders were up 2% year over year.

On a sequential basis, U.S. continued to accelerate 2% and Latin America again witnessed double-digit growth. Further, U.S. public sector grew 10%; U.S. federal was up 24% and U.S. state and local improved 1%. Also, U.S. enterprise grew 21% and U.S. commercial increased 11%.

EMEA rose 2% year over year. Excluding Russia, EMEA grew 4%. Also, APJC rose 1% year over year.

Total emerging markets were flat. Excluding BRICS and Mexico, emerging markets were up 6%. In particular, Russia was down 41%; Brazil 10% and China 20%. However, Mexico and India rose 53% and 6%, respectively.

Gross Margin

Pro-forma gross margin was 62.1%, up 71 basis points (bps) sequentially but down 19 bps year over year.

Cisco's operating expenses of $4.4 billion increased 4.5% sequentially and 3% year over year. Research & development and sales & marketing expenses decreased slightly, as a percentage of sales, from the year-ago quarter, while general and administrative expenses remained flat. The net result was an operating margin of 25.6%, down 30 bps sequentially but up 60 bps from the year-ago figure of 25.0%.

Net Income

On a GAAP-basis, Cisco recorded a net profit of $2.4 billion or 47 cents per share compared with $2.2 billion or 42 cents in the year-ago quarter. On a pro-forma basis, Cisco generated adjusted net profit of $2.56 billion as against $2.41 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 $54.4 billion versus $53.0 billion in the prior quarter. Trade receivables were $4.9 billion, up from $4.5 billion in the earlier quarter. Total debt (short-term and long-term) was $21.0 billion versus $20.5 billion in the last quarter.

The company generated operating cash flow of $3.0 billion and spent $0.4 billion on capital expenditure, netting a free cash flow of $2.68 billion.

Share Repurchase & Dividend

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

The company bought back approximately 35 million shares under the stock repurchase program at an average price of $28.39 a share for an aggregate purchase price of $1.0 billion.

Guidance

For the fourth quarter of fiscal 2015, Cisco expects revenues to increase in the range of 1% to 3% on a year-over-year basis. Non-GAAP gross margin is expected within 61-62% and non-GAAP operating margin to be 27.5-28.5% of revenues. The company expects GAAP tax rate of 22%, yielding non-GAAP earnings per share of 55 to 57 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 third-quarter results with the top line beating the Zacks Consensus Estimate, reflecting Cisco's superior strategy and innovation. Also, new products aided revenue growth.

The company's strategy of diversifying its business by rolling out software-based networking tools and security services, and relying less on specialized routers and switching equipment appears to benefit the company. However, weakness in a few emerging markets and service provider business could impact profitability in the near term.

Nevertheless, the continuous dividend payment and share buyback activity indicate that Cisco is heading toward strong growth. Though the company's margins have remained under pressure, areas like NGN Routing and data center are witnessing growth, which will likely offset the margin slowdown.

Cisco carries a Zacks Rank #3 (Hold). Some better-ranked stocks include Infinera Corporation INFN , Cognex Corporation CGNX and Teradyne Inc. TER . While Infinera sports a Zacks Rank #1 (Strong Buy), Cognex and Teradyne carry a Zacks Rank #2 (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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