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Dow-30 Earnings: Cisco Systems - Fiscal Fourth Quarter 2012
Leading networking equipment maker and Dow-30 component Cisco Systems (CSCO – Free Cisco Stock Report) has reported solid fiscal fourth-quarter (ended July 28th) results, and the heretofore out-of-favor stock rebounded sharply in response. Revenues of $11.7 billion were slightly ahead of our $11.5 billion estimate and up over 4% on a year-to-year basis. Overall product revenues of $9.2 billion advanced 3%, while services increased 12%. From a geographic perspective, the Americas were up 7%, while Asia grew 9%. Macroeconomic weakness in Southern and Central Europe continued, driving revenues for the EMEA region down 5%.
The Routing segment posted a 4% revenue advance. This compared favorably with rival Juniper's (JNPR) result of an 18% decline. Optical fell 20% due to declining capital expenditure budgets among European service providers and governments of developed nations.
Revenues at the Switching segment were flat, with fixed switching up 3% thanks to the Nexus 2000 and 5000 devices. Demand for these products was healthy due largely to strong data center build outs and the transition to 10G Ethernet infrastructure. Modular switching was down 7% because of a planned transition from the CAT 6000 line toward the Nexus products. Importantly, Cisco remains at 70% revenue share of the LAN-switching market.
Even more impressive, the data center business was up a staggering 90% year over year and 42% sequentially. We credit seasonality, a transition to Romley server processors, and the value proposition presented by Cisco's Unified Computing System for the advance. On the other hand, Collaboration sales (7.5% of revenues) fell 8%, owing to weak Telepresence volumes in the public sector. That customer group and the European region both fell around 30%.
The product gross margin declined 160 basis points sequentially, to 60.4%, the lowest level in several years. This was due to pricing, a mix shift toward less-lucrative data center products, and higher overall manufacturing costs from elevated warranty expenses. The company also won some large service provider deals in China and India where it competes with relatively low-cost vendor Huawei. Cisco expects this crucial fundamental to bounce back to 61%-62% in the current quarter. All told, GAAP earnings per share of $0.36 came in a penny shy of our estimate, but were 64% above the year-earlier tally.
In other news, Cisco has upped its quarterly cash dividend 75%, from $0.08 a share to $0.14. Management made a commitment to distributing a minimum of 50% of its free cash flow annually through dividends and share repurchases, while still investing in its business and making strategic acquisitions. Although the company has $6 billion in cash in the U.S., we believe it may need to tap into its overseas cash hoard at some point to maintain these objectives.
Total product orders were up 2% year over year in the July interim, despite tough comparisons. Cisco faces similarly challenging comparisons in the current quarter. The Americas saw orders up 4%. State and local governments and commercial customers showed encouraging progress, while federal orders remained weak. Although still early, this may signal the start of an uptrend in the U.S. Meanwhile, Europe, the Middle East, Africa, and Russia product orders were down 6%. European public sector and enterprise fell 13% and 15%, respectively, offset by strength in emerging markets. Global enterprise orders advanced 6%, while service provider sales fell 1%. In the states, AT&T (T - Free AT&T Stock Report) has mentioned that its capital spending in the second half of 2012 would likely be up marginally over the first half. Still, European service providers should be “very conservative” with their capital expenditures.
The company's GAAP earnings guidance for the October period of $0.32-$0.38 was below our $0.42 call, likely due to concerns over Europe's economy and IT spending. We believe this may prove conservative, which is why we are only lowering our October and full-year fiscal 2013 earnings estimates by $0.02 and $0.05 a share, respectively, to $0.40 and $1.65.
About The Company: Cisco Systems Incorporated is a leading provider of Internet Protocol-based networking and other products for transporting data, voice, and video across geographically dispersed local-area networks, metropolitan-area networks, and wide-area networks. Devices are primarily integrated by Cisco IOS Software and include Routers, Switches, New Products, and Other. Provides services associated with these products. Foreign business accounted for 46.5% of fiscal 2011 revenues. R&D, 13.5% of revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.