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Dow-30 Earnings: Cisco Systems - Fiscal First Quarter 2013
The world's largest networking equipment maker and Dow-30 component, Cisco Systems (CSCO – Free Cisco Stock Report), has reported fiscal first-quarter (ended October 27th) results that were in line with our expectations. Record revenues of $11.9 billion matched our call and were 1% higher than Wall Street's consensus estimate, as well as 5.5% above the prior year's October-quarter tally. The advance came despite a challenging global economic environment. Product revenues grew 4% while the highly profitable Services unit's contribution was up 12%. The latter segment has achieved a CAGR of 12% over the last decade, providing a level of stability to the overall business. GAAP earnings per share of $0.39 came in a penny shy of our expectation, but beat the consensus estimate by $0.02 and rose 18% year over year, allowing CSCO to once again achieve its goal of increasing earnings faster than revenues. Investors were clearly thrilled with the report, and bid CSCO shares sharply higher as a result.
The highly scrutinized non-GAAP product gross margin increased 110 basis points sequentially and 200 basis points year over year, to 61.5%. This was within the guidance range of 61% to 62% and would have been higher excluding the recent acquisition of pay TV software developer NDS. The increase was primarily due to lower overall manufacturing costs and improved commodity pricing, as discounting was within the typical range. The Asia margin was weaker, as price concessions are necessary for customers to afford equipment, and competition remains heated. Management maintained its prior gross margin guidance range for the current quarter, which we view as highly achievable due to an increased focus on reducing the number of concurrent product launches, “value engineering efforts”, and best-in-class sales execution.
Switching revenues declined 2%, as challenges in the U.S. public sector and Europe offset strength in Data Centers and the Nexus 2000, 5000, and 7000 lines. Notably, margins for the high-end 7000 switches are now at the segment average after being a drag on profitability for over two years. We believe CSCO maintained approximately 62% of the switching market.
Revenues from the Routing segment fell 2% year over year, as double-digit growth in edge routers couldn't offset declines in core routers. This was largely due to weak service provider revenues in Europe and declines in optical networking devices, owing to migration to faster products. Still, this result was better than that of its nearest competitor, Juniper (JNPR), which saw routing revenues fall 7%. We credit Cisco's massive preexisting user base and strong customer relationships for the recent outperformance. Notably, major customer AT&T (T - Free AT&T Stock Report) recently upped its capital expenditure expectation from $20 billion in 2012 to $22 billion in each of the next three years.
Data center products gained 61% as the company's Unified Computing System continued to win market share. Managers investing in data centers appear accepting of Cisco's one-stop shopping approach. The company is even seeing data center customers buy more of its communications products.
IT departments seem less interested in Cisco's collaboration suite (revenues down 8%). These products are viewed as less of a priority in uncertain economic times. We think it will be a while before this market recovers, especially due to its significant exposure to the public sector.
Orders in the quarter were flat overall after 13% growth in the comparable period last year. Orders at the Americas were only up 2%, as 13% growth from U.S. service providers and 9% from enterprises (excludes struggling global financial companies) offset a 15% decline in the public sector. Although all areas showed sequential improvement, Cisco is waiting another quarter before proclaiming a sustained recovery in the United States, a market it believes is a leading indicator of global growth. We think the looming “fiscal cliff'” will only have a marginal impact on Cisco's business. The Asia Pacific, Japan, and China region was up 7% in total. China itself was flat, and weakness there should persist for the next few quarters, as demand for networking gear has waned. Still, we have confidence in Cisco's ability to compete with low-cost vendor Huawei, due to its superior product quality. In Europe, the Middle East, Africa, and Russia, orders fell 10%, mostly due to a 19% decline in service provider revenues. We believe conditions in Europe are likely to get worse before they get better.
The company's guidance assumes macroeconomic conditions remain stagnant over the near term. For the January quarter, Cisco expects revenues to be up 3.5% to 5.5%, which is in line with our 5% estimate. Its GAAP earnings-per-share guidance of $0.36-$0.40 is somewhat below our prior expectation. As a result, we have trimmed a nickel from our fiscal 2013 forecast, which now stands at $1.65.
Overall, Cisco is executing admirably, outperforming competitors, and appears well exposed to strong growth markets like cloud computing, “bring your own device”, mobile phones, data centers, and video. Investors looking to gain a stake in a financially strong technology company with well-defined prospects would be wise to consider these shares, in our view.
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 42.4% of fiscal 2012 revenues. R&D, 11.9% of revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.