Cisco Systems (CSCO) reported first-quarter fiscal 2015 earnings of 48 cents, in line with the Zacks Consensus Estimate of 48 cents. The adjusted earnings per share exclude one-time items but include stock-based compensation expenses.
Following the earnings results, Cisco’s share price plunged 1.6% on weaker-than-expected guidance. The company’s cut the second-quarter guidance, which missed analysts' estimates, after phone carriers like AT&T, Inc. (T) lowered the 2015 capital spending by 14% on networking equipment.
Revenues
Revenues decreased 0.9% sequentially but increased 1.3% year over year to $12.23 billion and surpassed the Zacks Consensus Estimate of $12.13 billion.
On a year-over-year basis, products (77.1% of total revenue) were up 0.4% to $9.4 billion and Services (22.9% of total revenue) rose 4.5% to $2.8 billion. Product book-to-bill ratio was below 1.
Revenues increased year over year across all geographies, except Asia-Pacific, Japan and China (collectively known as APJC). The Americas, and Europe, Middle East and Africa (EMEA) increased 3% and 2%, respectively, while APJC declined 5%.
Product Revenues by Category
Switching (31% of total revenue), NGN Routing (16%), Collaboration (8%), Security (4%) and Other Products (1%) increased 5.4%, 0.3%, 1.6%, 1.8% and 9.8%, respectively, on a sequential basis.
However, this increase was partially offset by weak performance by Service Provider Video (7% of total revenue), Data Center (6%), Wireless (5%) and Service (23%) segments which declined 18.1%, 10.2%, 8.5%, and 0.5%, respectively, on a sequential basis.
Orders
Cisco’s total product orders in the quarter were up 1% year over year.
On a geographical basis, total U.S. product orders, excluding U.S. service provider, grew 12% with commercial increasing 7%, while enterprise declining 1%. Further, U.S. public sector grew 22%, U.S. federal was up 34%, while state and local declined 2% year over year.
Also, the company witnessed continued stabilization across Europe, with orders increasing 20% in the U.K. and 6% in Germany. Also, Southern Europe grew approximately 20% from the year-ago quarter.
Orders in the emerging markets declined 6% with APJC declining 12% year over year. However, India and EMEA were up a respective of 6% and 2% from the year-ago quarter. The other emerging countries in Asia declined 15% year on year.
Gross Margin
Reported gross margin for the quarter was 59.9%, flat sequentially but down 140 basis points (bps) from the year-ago quarter due to unfavorable product mix.
Cisco’s operating expenses of $5.0 billion increased 0.8% year over year. Research & development and general & administrative expenses decreased as a percentage of sales from the year-ago quarter, while sales & marketing expenses increased. The net result was an operating margin of 19.1%, down 260 bps sequentially and 120 bps from 20.3% in the year-ago quarter.
Net Income
On a GAAP basis, Cisco recorded a net profit of $1.83 billion or 35 cents per share compared with $2.0 billion or 37 cents in the year-ago quarter. On a pro-forma basis, Cisco generated adjusted net profit of $2.51 billion compared with $2.62 billion in the year-ago quarter.
Our pro-forma figure excludes certain one-time items but includes stock-based compensation expenses.
Balance Sheet
Cisco exited the first quarter with cash and investments balance of $52.1 billion, flat sequentially. Trade receivables were $4.4 billion, down from $5.2 billion in the prior quarter. Total debt (short-term and long-term) was $21.0 billion versus $20.9 billion in the last quarter. Including other long-term liabilities, the debt to total capital ratio was 27.0%.
The company generated operating cash flow of $2.5 billion and spent $0.29 billion on capital expenditure, netting a free cash flow of $2.21 billion.
Share Repurchase & Dividend
During the quarter, Cisco paid dividend worth $973 million.
The company repurchased approximately 41 million shares under the stock repurchase program at an average price of $24.58 per share for an aggregate purchase price of $1.0 billion.
Guidance
For the second quarter of fiscal 2015, Cisco expects revenues to increase in the range of 4% to 7% on a year-over-year basis. Non-GAAP gross margin is expected to be within 61–62% and non-GAAP operating margin is expected to be 27.5–28.5% of revenues. The company expects GAAP tax rate of 22%, yielding non-GAAP earnings per share of 50 to 52 cents. The Zacks Consensus Estimate for the upcoming quarter is 48 cents.
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 the top line figure beating the Zacks Consensus Estimate, reflecting Cisco’s superior strategy and innovation.
In the quarter, the company’s high-end switching and routing product segments performed well, driven by the momentum in its product introductions. However, emerging market weakness and product transition challenges contained growth.
Nevertheless, the continuous dividend payment and share buyback activity indicate that Cisco is heading toward strong future growth. Though the company’s margins have been under pressure, areas like cloud computing, mobile, data center and others are witnessing strong growth, which will likely offset the margin slowdown, going forward.
Cisco carries a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Mercadolibre, Inc. (MELI) and zulily, Inc. (ZU). Both the stocks sport a Zacks Rank #1 (Strong Buy).
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