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Cisco (CSCO) Q3 Earnings and Revenues Surpass Estimates

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Cisco Systems (CSCO - Free Report) reported third-quarter fiscal 2020 non-GAAP earnings of 79 cents per share that beat the Zacks Consensus Estimate by 9.7% and improved 1% year over year.

However, revenues declined 8% year over year to $11.98 billion but surpassed the consensus mark by 0.9%. The decline can be attributed to coronavirus crisis-induced supply chain and component constraints and associated manufacturing challenges.

Nevertheless, following the better-than-expected third-quarter results, Cisco’s shares are up 2.6% in the pre-market on Apr 14. Also, fiscal fourth-quarter guidance holds promise.



Cisco’s stock has fallen 12.5% year to date, compared with the industry’s decline of 10.2%.

Quarter in Detail

Region-wise, the Americas, the EMEA and the APJC revenues decreased 8%, 7% and 9% year over year, to $7.12 billion, $3.14 billion and $1.73 billion, respectively.

Service revenues (28.3% of total revenues) increased 5% to $3.39 billion, driven by growth in software and solution services. Software subscriptions represent 34% of Cisco’s software revenues, up 9% year over year.

Product revenues (71.7% of total revenues) declined 12% on a year-over-year basis to $8.6 billion.

Total product orders were down 5% on a year-over-year basis. In terms of customer segments, product orders for public sector was up 1%. Commercial, enterprise and service provider revenues were down 11%, 4% and 3%, respectively.

Region-wise, EMEA and APJC product orders decreased 4% and 22%, respectively, while product orders across the Americas were flat on a year-over-year basis. Product orders across total emerging markets declined 21% and the BRICs plus Mexico fell 29%.

Breakup of Product Revenues

Infrastructure Platforms comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues fell 15% year over year to $6.43 billion. The segment was severely impacted by coronavirus crisis-induced supply chain constraints.

Routing declined due to weakness in service provider and enterprise end markets. Switching declined in both campus and data center end markets. However, Cisco witnessed strong demand for Catalyst 9000 family of switches.

Additionally, wireless revenues declined overall despite strong growth in Meraki and strength across WiFi 6 products. Data Center revenues decreased owing to weak demand for servers, and HyperFlex solutions.

Applications consist of the Collaboration portfolio of Unified Communications (UC), Conferencing and TelePresence, IoT, and application software businesses such as AppDynamics and Jasper. Revenues decreased 5% year over year to $1.36 billion due to a decline in Unified Communications and TP end points, partially offset by double-digit growth at AppDynamics and IoT software.

Notably, solid uptake of Webex video conferencing and business productivity offerings amid the COVID-19 induced work-from-home demand environment mitigated the decline. Management stated that 95% of the Fortune 500 is now utilizing Cisco’s collaboration solutions.

Security revenues improved 6% to $776 million. The upside can be attributed to solid demand witnessed by identity and access, advanced threat, and unified threat management solutions, amid high growth in Internet traffic.

Cisco witnessed strong demand for cloud-based solutions, including Duo and Umbrella. The company’s differentiated end-to-end approach across the network, cloud and endpoints has helped it expand the clientele. The company introduced SecureX, comprehensive cloud-based security platform, to strengthen enterprise security infrastructure with unified visibility, automation and security capabilities across network endpoints, applications, and the cloud.

Other Products contains service provider video, cloud and system management, and various emerging technology offerings. Revenues slumped 27% to $28 million.

Partnerships & Product Roll Outs

Cisco’s integration with Microsoft’s (MSFT - Free Report) Azure Virtual WAN and Office 365, and deepening partnership with Amazon (AMZN - Free Report) cloud arm Amazon Web Services has prepared it to deliver highly secure end-to-end connectivity and better application performance. Moreover, the company has recently partnered with Alphabet’s (GOOGL - Free Report) Google Cloud. These partnerships with hyperscalers, is likely to help Cisco sell more of its SD-WAN solutions as customers shift more applications to the cloud.

The company also announced partnership with Oxbotica to enable seamless sharing of high-volume data in the autonomous vehicle space via its OpenRoaming initiative that offers an ability to unlock solutions to the large data transfer challenge for autonomous vehicle fleets.

Moreover, during the quarter under review, Cisco announced that it expanded cloud-driven solutions portfolio for small business buyers. The portfolio now includes solutions like Cisco Business Wireless Mobile App and Meraki Cloud-managed Smart Cameras.

Acquisitions

On Apr 6, Cisco announced plans to acquire New York-based wireless tech company — Fluidmesh Networks. The buyout of Fluidmesh is anticipated to strengthen Cisco’s Industrial IoT portfolio and enable it to address growing demand for IoT based solutions in the market. Nevertheless, the financial terms of the deal have been kept under wraps. The deal is expected to be completed by fourth-quarter fiscal 2020.

In early third quarter, Cisco completed its acquisition of Exablaze, a designer and manufacturer of advanced network devices, to reduce latency and improve network performance.

Operating Details

Non-GAAP gross margin expanded 200 basis points (bps) from the year-ago quarter to 66.6%. On a non-GAAP basis, product gross margin expanded 210 bps to 65.8% due to favorable mixand memory cost savings, partially negated by pricing impacts, while service gross margin expanded 160 bps to 68.9%.

Non-GAAP operating expenses were $3.81 billion, down 9% year over year. As a percentage of revenues, operating expenses contracted 60 bps to 31.8%.
 

Cisco Systems Inc Price, Consensus and EPS Surprise

Cisco Systems Inc Price, Consensus and EPS Surprise

Cisco Systems Inc price-consensus-eps-surprise-chart | Cisco Systems Inc Quote

Non-GAAP operating margin expanded 270 bps year over year to 34.9%.

Balance Sheet and Cash Flow

As of Apr 25, Cisco’s cash & cash equivalents and investments balance were $28.57 billion, compared with $27.06 billion as of Jan 25.

Total debt (short-term plus long-term), as of Apr 25, was $16.08 billion compared with $15.99 billion, as of Jan 25.

Operating cash flow was $4.2 billion compared with $3.8 billion reported in the prior quarter.

Remaining performance obligations (RPO) at the end of the reported quarter were $25.5 billion, up 11%. The metric represents total committed non-cancelable future revenues.

In the fiscal third quarter, Cisco returned $2.5 billion to shareholders through share buybacks worth $1 billion and dividends worth $1.5 billion. The company has $10.8 billion remaining under its current share buyback program, with no termination date.

Q4 Guidance

For fourth-quarter fiscal 2020, revenues are expected to decline 8.5-11.5% on a year-over-year basis. The Zacks Consensus Estimate for revenues is pegged at $11.99 billion, indicating a year-over-year decline of 10.7%.

Non-GAAP gross margin is expected in the range of 64-65%, while operating margin is anticipated between 31.5% and 32.5% for the quarter.

Non-GAAP earnings are anticipated between 72 cents and 74 cents per share. The Zacks Consensus Estimate for earnings is pegged at 69 cents per share, suggesting year-over-year decline of 16.9%.

Zacks Rank

Cisco currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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