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Cisco Systems (CSCO - Analyst Report) reported fourth quarter 2013 earnings of 49 cents a share, beating the Zacks Consensus Estimate of 47 cents on higher revenues and lower-than-expected operating expenses. The adjusted earnings per share exclude one-time items, but they include stock-based compensation expenses.

Revenues

Revenues increased 6.0% year over year and 1.6% sequentially to $12.4 billion. Products (78.4% of total revenue) were up 5.4% year over year to $9.7 billion. Services (21.6% of total revenue) jumped 8.0% year over year to $2.7 billion.

Revenues increased year over year across most geographies. The Americas region increased 6.6% year over year, while Europe, Middle East and Africa (EMEA) surged 11.5% from the year-ago quarter. However, Asia-Pacific, Japan and China (collectively known as APJC) declined 2.8% on a year-over-year basis.

Product Revenues by Category

Collaboration (7.9% of total revenue), Security (2.8% of total revenue) and Other Products (0.8% of total revenue) revenues declined 2.5%, 0.3% and 55.7% year over year, respectively.

However, this decline was fully offset by strong performances from Switching (30.7% of total revenue), NGN Routing (16.8% of total revenue), Service Provider Video (9.5% of total revenue), Wireless (5.1% of total revenue), Data Center (4.8% of total revenue) and Service (21.6% of total revenue) segments, which increased 5.1%, 0.3%, 22.8%, 31.6%, 42.9% and 5.6%, respectively.

Orders

Cisco’s total product orders in the quarter were up 4% year over year. The Americas region grew at 5%, and EMEA and Russia increased 6% from the year-ago quarter. Europe also gained 6%, particularly driven by increases in the North and UK regions. However, management remains cautious about the instability of the southern region.

APJC orders decreased 3% due to macroeconomic challenges. In the APJC region, Japan witnessed weak growth due to reduced capex and economic challenges. China also continued to see challenges related to the business environment, though the decrease in the business was less-than-expected.

Gross Margin

Reported gross margin for the quarter was 58.9%, down 180 basis points (bps) from 60.7% in the comparable year-ago quarter due to an unfavorable product mix.

Cisco’s operating expenses of $4.5 billion were flat year over year. But all three expenses, research & development, general & administrative and sales & marketing, declined as a percentage of sales from the year-ago quarter. The net result was an operating margin of 22.6%, up 210 bps year over year from 20.5% in the year-ago quarter.

Net Income

On a GAAP basis, Cisco recorded a net profit of $2.3 billion or 42 cents per share compared with $1.9 billion or 36 cents per share in the year-ago quarter. On a pro forma basis, Cisco generated adjusted net profit of $2.65 billion or earnings per share of 49 cents per share in the last quarter compared with $2.26 billion or 42 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 fourth quarter with cash and investments balance of $50.6 billion, up $3.2 billion during the quarter. Trade receivables were $5.47 billion, up from $4.94 billion in the prior quarter.

The company generated operating cash flow of over $4.0 billion and spent $2.1 billion on share repurchases and dividends.

Share Repurchase & Dividend

During the quarter, Cisco repurchased approximately 47 million shares of common stock under the stock repurchase program at an average price of $24.80 per share for an aggregate purchase price of $1.2 billion.

The company paid a cash dividend of 17 cents per common share, or $918 million.

Guidance

For the first quarter of fiscal 2014, Cisco expects revenues to increase in the range of 3% to 5% 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 of 50 to 51 cents per share. GAAP earnings are expected to be in the range of 16 to 20 cents.

Our Take

Cisco reported strong fourth quarter results with both the top and bottom lines exceeding the prior-year figures.

It is apparent that Cisco’s focus on various growth businesses including cloud computing, mobile, data center and others is paying off. Additionally, Cisco’s strategy of pursuing growth opportunities in international markets has helped to deliver positive results. Cisco is already the best entrenched company across the world and despite growing competition from several smaller players, the company appears to be strong in its domain.

Order growth in the last quarter was quite encouraging and the trend reflects Cisco’s superior strategy and innovation. Increasing strength in data center and wireless businesses will help to maintain the company’s strength.

However, the company provided a weak sales revenue guidance, stating slower-than-anticipated global economic recovery. In an effort to trim costs and focus on the company’s core businesses, the company plans to cut 4,000 jobs or 5% of its workforce.

Nonetheless, Cisco’s focus on new products and acquisitions resulted in continued market share gains. In this quarter, the company completed three acquisitions, namely Ubiquisys Limited, JouleX, Inc. and SolveDirect, and announced two more acquisitions in order to deliver top-line growth and profitability.

Cisco shares carry a Zacks Rank #2 (Buy). Other stocks that are performing well at current levels include SanDisk (SNDK - Analyst Report), Syntel Inc. (SYNT - Snapshot Report), and Silicom Ltd. (SILC), all carrying a Zacks Rank #1 (Strong Buy).

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