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Dow-30 Earnings: Cisco Systems - Fiscal First Quarter 2014
Telecom equipment bellwether and Dow-30 staple Cisco Systems (CSCO - Free Cisco Stock Report) has reported mixed fiscal 2014 first-quarter results (year ends July 26th). In the latest period, revenues expanded 1.8% year over year, well short of the company's previous guidance of 3%-5% growth, our estimate of a 4% improvement, and Cisco's long-term target range between 5% and 7% per year. Cisco shares fell more than 10% on the news.
Taking a closer look at product revenues (up 1%), sales of routers were down moderately, largely due to product transitions (discussed below). That trend was offset by relative strength in the data center, wireless, security and switching categories. As usual, growth in service revenues (up 4%) outpaced the much larger product divisions.
Meanwhile, share net of $0.53 in the October period marked a 10% year-over-year advance, handily beating the company's $0.50-$0.51 guidance range. We think a large part of the bottom-line increase can be attributed to the 4,000 layoffs announced in Cisco's August-quarter report. Still, other operating expenses should continue to decline as well, allowing the company to expand the bottom line at a faster pace than revenues, which has been the norm for the networking equipment maker in recent periods.
Perhaps the most disappointing news was management's forecast of a 11% companywide sequential revenue decline in the current quarter. That rate of attrition would be similar to levels felt during the IT slowdowns of 2001 and 2009. Cisco's forecast is largely influenced by October orders, which came in $600 million-$700 million below expectations. The company said the shortfall was difficult to predict since a large chunk of orders were booked in the last few weeks of the quarter.
Orders from U.S. enterprises were in the high-single digits, and government bookings have been decent despite a difficult operating environment, buoyed mostly by state and local governments. One problem is service providers appear hesitant to buy high-end routers since a wave of new technology is being released. To be sure, global economic uncertainty and poor visibility are also making some service provider CIOs more cautious with IT budgets.
Cisco sales in emerging markets, such as Brazil (down 25%), have been losing steam. Too, the company is reporting weak numbers in China (sales down 18%), due largely to political challenges and competition from low-cost Chinese vendor Huawei. We think Cisco will continue to experience difficulty expanding its market share in that nation. In addition, southern Europe remains weak. Although newly appointed managerial and sales staff will try to reverse those trends, we doubt it will be a quick fix.
Overall, the investment community was not pleased with this report. There are pockets of weakness around the globe, and the company has been exiting some of its unprofitable businesses while failing to replace those revenues. Eventually, service providers will need to upgrade high-capacity routers or risk a downgrade in service quality. We think Cisco's breadth of products, and its focus on data centers and infrastructure that deliver applications faster and more efficiently, should help ensure revenue growth stays in the mid-single-digit range for the intermediate term. While it now seems more likely that overall IT demand may stall in the near-term, we think Cisco shares still present compelling risk-adjusted long-term capital gains potential.
About The Company:Cisco Systems Incorporated is a leading supplier of high performance internetworking products for linking local-area and wide-area networks of computer systems. Products include routers, LAN and ATM switches, dial-up access servers, and network management software. The Cisco IOS software platform ties these products together, delivers network services, and enables networked applications.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.