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Cisco (CSCO) Tops Q1 Earnings and Revenues, Lowers View

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Cisco Systems Inc. (CSCO - Free Report) reported first-quarter fiscal 2017 earnings (including stock-based compensation) of 55 cents per share, which beat the Zacks Consensus Estimate by a penny. Excluding stock-based compensation, earnings decreased 3.3% from the year-ago quarter to 59 cents.

Although revenues declined 2.6% year over year to $12.35 billion, the figure was ahead of the Zacks Consensus Estimate of $12.34 billion. Revenues include SP Video CPE Business for both the periods. Excluding SP Video CPE Business, revenues increased 1% from the year-ago quarter.

However, shares fell more than 4% in after-hours trading following disappointing second-quarter guidance from the management primarily due to weak order trend from service providers (down 12% in the first-quarter). Notably, service providers comprise roughly 25% of the company’s business.

Segment Revenue Details

On a year-over-year basis, products (75.3% of total revenue) were down 5.5% to $9.30 billion, while services (24.7%) increased 7.5% to $3.05 billion.
 

 

Under the Product category, Switching, Collaboration, Data Center, Wireless and Service provider video decreased 7%, 3%, 3%, 2%, and 2%, respectively, on a year-over-year basis. However, this decrease was partially offset by strong performance from NGN Routing, Security and other segments which increased 6%, 11% and 88%, respectively.

Geographically, on a year-over-year basis, revenues from the Americas and EMEA declined 4% and 3%, respectively. APJC revenues increased 6% from the year-ago quarter. Total emerging markets declined 2% with the BRICs plus Mexico up 2%.

In terms of customer segments enterprise grew 5%, commercial grew 1%, public sector was flat and service provider dropped 12%.

During the reported quarter, Cisco completed the acquisition ContainerX (Read More: Cisco to Acquire ContainerX for Container Management). Further, the company bought CloudLock and Heroik Labs.

Operating Details

Non-GAAP gross margin expanded 190 basis points (bps) from the year-ago quarter to 64.7% in the reported quarter. The expansion was primarily driven by higher product gross margin (up 250 bps), which increased due to continued productivity improvements.

Operating expenses as percentage of revenues increased 100 bps to 36.1% primarily owing to increase in all the expense line items. As percentage of revenues, Research and development (R&D), Sales and Marketing (S&M) and General and Administrative (G&A) expenses increased 20 bps, 30 bps and 20 bps, respectively.
 

CISCO SYSTEMS Price, Consensus and EPS Surprise

 

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

Nevertheless, operating margin expanded 90 bps to 28.6% due to higher gross margin base.

Balance Sheet and Cash Flow

Cisco exited the fiscal quarter with cash and investments balance of almost $71 billion compared with $65.8 billion in the prior quarter. Cash & cash equivalents and investments available in the U.S. at the end of quarter were $10.4 billion.

Total debt (short-term and long-term) was $34.8 billion, significantly up from $28.6 billion at the end of previous quarter.

Net cash flow from operating activities decreased to $2.73 billion from $3.82 billion at the end of the previous quarter. Further, free cash flow declined almost $1.10 billion in the reported quarter.  

During the quarter, Cisco paid cash dividend worth $1.3 billion and repurchased approximately 32 million shares for $1 billion.

As of Oct 29, 2016, Cisco had repurchased 4.6 billion shares for an aggregate purchase price of approximately $97.6 billion since the inception of the stock repurchase program. The remaining authorized amount under this program is approximately $14.4 billion.

Guidance

For the second-quarter of fiscal 2017, revenues (excluding the SP Video CPE Business) are expected to decline in the range of 2% to 4% on a year-over-year basis. Non-GAAP earnings are anticipated to be in the range 55–57 cents per share.

Gross margin is expected to be in the range of 63–64%, while operating margin is anticipated between 29% and 30% for the quarter.

Our Take

The modest first-quarter results and the disappointing guidance will weigh on the stock price in the near term. Intensifying competition from several smaller players, slowing order growth from service providers and challenges in the emerging markets are the primary headwinds.

Nonetheless, we believe Cisco’s expanding footprint in the rapidly growing security and data center market are promising. In this regard, Cisco’s partnership with Pure Storage (PSTG - Free Report) related to Flashstck will boost the company’s position in the data center market.

Additionally, the company’s partnerships with the likes of salesforce.com (CRM - Free Report) and IBM (IBM - Free Report) will help it to gain significant traction in the cloud and Internet of Things (IoT) market space going ahead.

Further, the collaboration with cloud-based Evergent Technologies will bolster Cisco’s presence in the over-the-top (OTT) video market.

Moreover, continued share buyback and dividend hikes are positive in our view.

Zacks Rank & Key Picks

Cisco carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

 

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