Cisco Systems (CSCO) reported first-quarter fiscal 2014 earnings of 48 cents a share, beating the Zacks Consensus Estimate by a penny. The adjusted earnings per share exclude one-time items but include stock-based compensation expenses.
Revenues
Revenues increased 1.8% year over year but were down 2.4% sequentially to $12.1 billion. Products (77.8% of total revenue) were up 1.1% year over year to $9.4 billion. Services (22.2% of total revenue) jumped 4.2% year over year to $2.7 billion.
Revenues increased year over year across most geographies. The Americas increased 4.2% year over year, while Europe, Middle East and Africa (EMEA) surged 3.2% from the year-ago quarter. However, Asia-Pacific, Japan and China (collectively known as APJC) declined 8.7% on a year-over-year basis.
Product Revenues by Category
NGN Routing (16.9% of total revenue), Collaboration (8.5% of total revenue), Service Provider Video (8.2% of total revenue) and Other Products (0.7% of total revenue) revenues declined 0.4%, 10.5%, 3.2% and 63.6% year over year, respectively.
However, this decline was fully offset by strong performances from Switching (31.1% of total revenue), Security (3.0% of total revenue), Wireless (4.5% of total revenue), Data Center (5.0% of total revenue) and Service (22.2% of total revenue) segments, which increased 3.8%, 8.0%, 29.5%, 23.7% and 4.2%, respectively.
Orders
Cisco’s total product orders in the quarter were down 4% year over year. The U.S. public sector grew 2%, which was more than offset by the 12% order decline in emerging markets and 13% in service provider.
On a geographical basis, the Americas declined 2% and EMEA and Russia decreased 4% from the year-ago quarter. Central Europe continued to show positive growth, while southern Europe continued to be challenging.
APJC orders decreased 10% due to macroeconomic challenges. In the APJC region, China continued to see challenges related to the business environment.
Gross Margin
Reported gross margin for the quarter was 61.3%, up 210 basis points (bps) sequentially and 30 bps from 61.0% in the comparable year-ago quarter due to favorable product mix.
Cisco’s operating expenses of $5.0 billion increased 7.9% year over year. Research & development expenses increased as a percentage of sales from the year-ago quarter, while general & administrative and sales & marketing, declined. The net result was an operating margin of 20.3%, down 240 bps sequentially and 200 bps year over year from 22.3% in the year-ago quarter.
Net Income
On a GAAP basis, Cisco recorded a net profit of $2.0 billion or 37 cents per share compared with $2.1 billion or 39 cents per share in the year-ago quarter. On a pro-forma basis, Cisco generated adjusted net profit of $2.62 billion or earnings per share of 48 cents in the last quarter compared with $2.35 billion or 44 cents in the year-ago quarter.
Our pro-forma figure excludes certain one-time items but includes stock-based compensation expenses.
Balance Sheet
Cisco ended the first quarter with cash and investments balance of $48.2 billion, down $2.4 billion during the quarter. Trade receivables were $5.19 billion, down from $5.47 billion in the prior quarter. Days sales outstanding (DSOs) went down from 40 days to around 39 days.
The company generated operating cash flow of $2.6 billion and spent $0.32 billion on capital expenditure.
Share Repurchase & Dividend
During the quarter, Cisco repurchased shares worth $2 billion and paid a total dividend of $914 million.
Guidance
For the second quarter of fiscal 2014, Cisco expects revenues to decrease in the range of 8% to 10% on a year-over-year basis. Non-GAAP gross margin is expected to be 61%–62% and non-GAAP operating margin is expected to be 27.5%–28.5% of revenues. The company expects a non-GAAP tax rate of 21%, yielding non-GAAP earnings per share of 45 cents to 47 cents.
For fiscal 2014, non-GAAP earnings are expected in the range of $1.95 to $2.05 per share.
Our Take
Despite growing competition from several smaller players, Cisco appears to be strong in its domain. The company reported decent first-quarter results with both the top and bottom lines exceeding the prior-year figures, reflecting Cisco’s superior strategy and innovation.
However, the weakness in the service provider segment, emerging markets challenges and slower-than-expected growth in its two new platforms– NCS and CRS-X – contained strong growth in the last quarter.
Also, the order growth in the last quarter was quite weak which impacted the revenue guidance for the second quarter. The company provided weak revenue guidance, stating slower-than-anticipated global economic recovery.
Cisco shares carry a Zacks Rank #4 (Sell). Other stocks that are performing well at current levels include Melco Crown Entertainment Limited (MPEL), Best Buy Inc. (BBY) and Northern Oil And Gas Inc. (NOG). All these stocks carry a Zacks Rank #1 (Strong Buy).
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