Cisco (CSCO) 3Q Earnings In Line, Revenues Top, Stock Up

Cisco Systems (NASDAQ:CSCO) reported third-quarter fiscal 2016 earnings of 50 cents, in line with the Zacks Consensus Estimate. The adjusted earnings per share figure exclude one-time items but include stock-based compensation expenses.

Following the announcement, Cisco’s shares gained more than 5%. Strong execution, continued strong margins, solid demand for the company’s security products, an upbeat forecast for the upcoming quarter and momentum in growth areas led to the rally.

Revenues

Revenues increased 0.6% sequentially but declined 1.1% year over year to $12.0 billion and came slightly above the Zacks Consensus Estimate of $11.9 billion.

On a year-over-year basis, products (74% of total revenue) were down 4.8% to $8.9 billion but Services (26%) rose 11.2% to $3.1 billion.

Product Revenues by Category

NGN Routing (16%), Collaboration (9%), Wireless (5%), Security (4%), Service (26%) and Other Products (1%) segments increased 2.7%, 4.9%, 0.3%, 4.3%, 6.1% and 15.6%, respectively, on a sequential basis.

However, this increase was offset by sequentially weak performance by Switching (29%), Data Center (7%) and Service Provider Video (4%) which declined 1.0%, 1.3% and 29.3%, respectively.

Revenues by Geography

On a sequential basis, revenues from Americas improved 2.2%, Asia-Pacific, Japan and China (collectively known as APJC) improved 0.5%, while Europe, Middle East and Africa (EMEA) declined 2.8%.

Gross Margin

Pro-forma gross margin was 64.7%, up 134 basis points (bps) sequentially and 262 bps year over year.

Cisco’s operating expenses of $4.6 billion increased 8.8% sequentially and 3.1% year over year. As a percentage of sales, all three expenses — research & development, sales & marketing expenses as well as general & administrative — increased year over year. The net result was an operating margin of 26.7%, down 4.8% sequentially but up 3.0% year over year.

Net Income

On a GAAP basis, Cisco recorded a net profit of $2.3 billion or 46 cents per share compared with $2.4 billion or 47 cents last year. On a pro-forma basis, the company generated adjusted net profit of $2.54 billion compared with $2.56 billion a year ago.

Our pro-forma figure excludes certain one-time items but includes stock-based compensation expenses.

Balance Sheet

Cisco exited the fiscal quarter with cash and investments balance of $63.5 billion compared with $60.4 billion in the prior quarter. Trade receivables were $4.0 billion, down from $4.3 billion in the earlier quarter. Total debt (short-term and long-term) was $28.6 billion versus $24.6 billion in the prior quarter.

The company generated operating cash flow of $3.1 billion and spent $0.3 billion on capital expenditure, netting a free cash flow of $2.8 billion.

Share Repurchase & Dividend

During the reported quarter, Cisco paid $1.3 billion as dividend.

The company bought back approximately 27 million shares under the repurchase program at an average price of $24.08 a share or a total of $649 million.

Guidance

For the fourth quarter of fiscal 2016, Cisco expects revenues to increase in the range of 0% to 3% 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 63–64% and operating margin is projected in the range of 29–30% of revenues. The company expects a non-GAAP tax rate of 22%, yielding non-GAAP earnings per share of 59 cents to 61 cents. The Zacks Consensus Estimate is pegged at 53 cents. GAAP earnings per share are expected in the range of 48 cents to 53 cents.

Our Take

Despite intensifying competition from several smaller players, Cisco remains strong in its domain. The company reported decent fiscal third-quarter results with the top line exceeding the Zacks Consensus Estimate but the bottom line matching the same.

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 Jasper Technologies, Acano, Synata, Leaba and CliQr, increasing its share in the fast growing cloud, IoT, data analytics and video markets. Moreover, continued share buyback and dividend hikes should inspire investors’ loyalty.

However, weakness in a few emerging markets, slower growth across various product categories and a weak macro environment could impact profitability in the near term.

Cisco carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same space are Radcom Ltd. (NASDAQ:RDCM) and Netgear Inc. (NASDAQ:NTGR) , sporting a Zacks Rank #1 (Strong Buy), and Digi International Inc. (NASDAQ:DGII) , carrying a Zacks Rank #2 (Buy).

CISCO SYSTEMS (CSCO): Free Stock Analysis Report

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RADCOM LTD (RDCM): Free Stock Analysis Report

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