Cisco Systems (CSCO) reported second-quarter fiscal 2015 earnings of 50 cents, which surpassed the Zacks Consensus Estimate of 45 cents. The adjusted earnings per share exclude one-time items but include stock-based compensation expenses.
Strong year-over-year revenue growth led to 6.8% jump in Cisco’s share price. Order growth in new markets such as software-defined networking was also encouraging.
Revenues
Revenues decreased 2% sequentially but increased 7% year over year to $11.9 billion and beat the Zacks Consensus Estimate of $11.77 billion.
On a year-over-year basis, products (76% of total revenue) were up 7.8% to $9.1 billion and Services (24%) rose 4.6% to $2.9 billion. Product book-to-bill ratio was greater than 1.
Product Revenues by Category
Collaboration (8%), Data Center (7%), Wireless (5%) increased 4.3%, 22.1% and 1%, respectively, on a sequential basis.
However, this increase was offset by weak performance by Switching (30% of total revenue), NGN Routing (15%), Service Provider Video (7%), Security (3%), Service (24%) and Other Products segments, which declined 6%, 9.5%, 10.9%, 8.6%, 1.7% and 11.9%, respectively, from the last quarter.
Revenues by Geography
Revenues increased sequentially across all geographies except the Americas. On a sequential basis, Europe, Middle East and Africa (EMEA) increased 3%; Asia-Pacific, Japan and China (collectively known as APJC) improved 0.1%, while the Americas decreased 5.3% in the second quarter.
Orders
Cisco’s total product orders were up 5% year over year.
On a sequential basis, U.S. continued to accelerate 7% and Latin America returned to double-digit growth of 12%. Further, U.S. public sector grew 17%; U.S. federal was up 23% and U.S. state and local improved 8%.
EMEA rose 7% year over year. Specifically, the U.K. was up 17%; Germany 12% while Southern Europe grew 20% year over year.
In APJC region, China declined 19%. Excluding China, the rest of APJC was down 1%.
Total emerging markets grew 1%. Excluding BRICS and Mexico, emerging markets were up 8%. In particular, Russia was down 16%; Brazil 8%, while Mexico and India rose 21% and 11%, respectively.
Gross Margin
Reported gross margin was 59.4%, down 50 basis points (bps) sequentially but up 610 bps year over year.
Cisco’s operating expenses of $4.3 billion increased 4.5% year over year. Research & development and general & administrative expenses increased slightly, as a percentage of sales, from the year-ago quarter, while sales & marketing expenses decreased. The net result was an operating margin of 22%, up 290 bps sequentially and 710 bps from the year-ago figure of 14.9%.
Net Income
On a GAAP basis, Cisco recorded a net profit of $2.4 billion or 46 cents per share compared with $1.4 billion or 27 cents in the year-ago quarter. On a pro-forma basis, Cisco generated adjusted net profit of $2.58 billion as against $2.26 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 $53.0 billion versus $52.1 billion in the prior quarter. Trade receivables were $4.5 billion, up from $4.4 billion in the earlier quarter. Total debt (short-term and long-term) was $20.5 billion versus $21.0 billion in the last quarter. Including other long-term liabilities, the debt to total capital ratio was 26.0%.
The company generated operating cash flow of $2.9 billion and spent $0.27 billion on capital expenditure, netting a free cash flow of $2.6 billion.
Share Repurchase & Dividend
During the quarter, Cisco paid dividend worth $974 million. It also declared a quarterly dividend of 21 cents per common share — up 10% from the previous quarter's dividend of 19 cents — to be paid on Apr 22.
The company repurchased approximately 44 million shares under the stock repurchase program at an average price of $27.63 per share for an aggregate purchase price of $1.2 billion.
Guidance
For the third quarter of fiscal 2015, Cisco expects revenues to increase in the range of 3% to 5% 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 51 to 53 cents. The Zacks Consensus Estimate for the upcoming quarter is 47 cents.
Our Take
Despite growing competition from several smaller players, Cisco appears to be strong in its domain. The company reported decent second-quarter results with the top and the bottom lines beating the respective 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 could impact profitability in the near term.
As part of its restructuring efforts, the company has been laying off some workers while hiring others with new skills.
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). Some better-ranked stocks in the same space include Emulex Corporation (ELX), Infinera Corporation (INFN) and NetScout Systems, Inc. (NTCT). All these stocks sport a Zacks Rank #1 (Strong Buy).
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