Cisco (CSCO) Beats Earnings And Revenue Estimates In Q4

Cisco Systems (NASDAQ:CSCO) reported fourth-quarter fiscal 2016 earnings of 58 cents, exceeding the Zacks Consensus Estimate by 3 cents. The adjusted earnings per share figure exclude one-time items but include stock-based compensation expenses.

Moreover, management took the opportunity to announce a restructuring initiative that would reduce the head count by 5,500 positions or 7% effective first-quarter fiscal 2017.

The company intends to reinvest the cost savings from these actions in key priority areas such as security, IoT, collaboration, next generation data center and cloud.

Following the earnings announcement, Cisco’s shares slipped more than 1%. Slowing growth in the company’s Service Provider business and Emerging Markets were also concerns in the reported quarter.

Revenues

Revenues increased 5.3% sequentially but declined 1.6% year over year to $12.6 billion, which came above the Zacks Consensus Estimate of $12.5 billion.

On a year-over-year basis, products (76% of total revenue) were down 3.6% to $9.6 billion but services (24%) rose 5.3% to $3.1 billion.

Product Revenues by Category

On a sequential basis, Switching, Collaboration, Data Center, Wireless, Security and Other increased 10.1%, 7.5%, 7.6%, 22.3%, 12.0% and 39.3%, respectively. However, this increase was offset by a weak sequential performance from NGN Routing, Service Provider Video and Service which declined 1.0%, 5.1% and 1.2%, respectively.

On a year-over-year basis, Switching, Collaboration, Wireless, Security, Other and Service increased 2.0%, 5.6%, 5.2%, 16.4%, 110.2% and 5.3%, respectively. However, this increase was offset by weak performance from NGN Routing, Data Center and Service Provider Video which declined 5.8%, 0.8% and 55.3%, respectively.

Revenues by Geography

On a sequential basis, revenues from Americas improved 8.2%, Europe, Middle East and Africa (EMEA) improved 3.5%, while Asia-Pacific, Japan and China (collectively known as APJC) declined 2.2%.

On a year-over-year basis, all three regions demonstrated a decline. Revenues from Americas, EMEA and APJC declined 2.1%, 0.2% and 1.9% respectively.

Gross Margin

Pro-forma gross margin was 64.2%, down 46 basis points (bps) sequentially but up 257 bps year over year.

Cisco’s operating expenses of $4.5 billion decreased 1.5% sequentially and 1.3% year over year. As a percentage of sales, research & development expenses increased year over year, sales & marketing expenses decreased for the same period, while general & administrative expenses remained flat. The net result was an operating margin of 28.7%, up 13.2% sequentially and 7.7% year over year.

Net Income

On a GAAP basis, Cisco recorded a net profit of $2.8 billion or 56 cents per share compared with the lower $2.3 billion or 45 cents last year. On a pro-forma basis, the company generated adjusted net profit of $2.9 billion compared with the lower $2.7 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 $65.8 billion compared with $63.5 billion in the prior quarter. Trade receivables were $5.8 billion, up from $4.0 billion in the earlier quarter. Total debt (short-term and long-term) was $28.6 billion, which was flat sequentially.

Share Repurchase & Dividend

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

The company bought back approximately 28 million shares under the repurchase program at an average price of $28.70 a share or a total of $800 million.

Guidance

For the first quarter of fiscal 2017, Cisco expects revenues in the range of -1% to 1% 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% of revenues 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 58 cents to 60 cents. The Zacks Consensus Estimate is pegged at 55 cents. GAAP earnings per share are expected in the range of 42 cents to 47 cents.

CISCO SYSTEMS Price, Consensus and EPS Surprise

CISCO SYSTEMS Price, Consensus and EPS Surprise | CISCO SYSTEMS Quote

Our Take

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

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 also announced its plans to acquire a cloud-based security company, CloudLock, for $293 million in cash and stock. The company expects the acquisition to close in the first quarter of fiscal 2017, subject to customary closing conditions. The buyout will enhance Cisco’s current cloud security offerings through increased visibility and threat awareness of CloudLock’s cloud delivered platform. The purchase will help the network equipment maker to broad-base its efforts and meet the changing compliance and security needs.

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 #3 (Hold). 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).