Cisco Systems (CSCO) reported fourth-quarter fiscal 2014 earnings of 50 cents beating the Zacks Consensus Estimate of 48 cents. The adjusted earnings per share exclude one-time items but include stock-based compensation expenses.
The better-than-expected earnings were driven by improving markets for the company's products in the United States and Europe, strong renewals, large multi-year service wins and growth in new businesses like cloud computing, consulting, managed services and security.
Revenues
Revenues decreased 0.5% year over year but increased 7.8% sequentially to $12.4 billion and surpassed the Zacks Consensus Estimate of $12.1 billion.
Products (77.1% of total revenue) were down 2.1% year over year to $9.5 billion, while Services (22.9% of total revenue) rose 5.4% year over year to $2.8 billion. Product book-to-bill ratio was greater than 1 in the reported quarter.
Revenues increased sequentially across all geographies. On a sequential basis, the Americas, and Europe, Middle East and Africa (EMEA) increased 9.4% and 1.3%, respectively, while Asia-Pacific, Japan and China (collectively known as APJC) improved 8.1%.
Product Revenues by Category
Service Provider Video (8% of total revenue), Data Center (6%), Wireless (5%) Security (3%) and Service (24%) increased 7.8%, 28.5%, 22.4%, 22.5% and 5.1% year over year, respectively.
However, this increase was partially offset by weak performance by Switching (29% of total revenue), NGN Routing (17%), Collaboration (8%), and Other Products (1%) segments, which decreased 2.8%, 4.9%, 9.1%, and 23.8% year over year, respectively.
Orders
Cisco's total product orders in the quarter were up 1% year over year.
On a geographical basis, total U.S. product orders grew 7% with commercial and enterprise increasing more than 15%. Also, the company witnessed continued stabilization across Europe, with orders increasing 6% in the U.K. and 16% in Germany.
However, orders in the emerging markets declined 9% with APJC, China and the remaining emerging Asian countries down 7%, 23% and 34%, respectively, year over year. However, India and EMEA were up a respective of 18% and 2% year over year.
Gross Margin
Reported gross margin for the quarter was 59.9%, down 80 basis points (bps) sequentially but up 70 bps from 59.2% in the comparable year-ago quarter. The sequential decrease was due to unfavorable product mix.
Cisco's operating expenses of $4.7 billion increased 4.2% year over year. Research & development and sales & marketing expenses increased as a percentage of sales from the year-ago quarter, while general & administrative expenses declined. The net result was an operating margin of 21.7%, down 30 bps sequentially and 100 bps from 22.7% in the year-ago quarter.
Net Income
On a GAAP basis, Cisco recorded a net profit of $2.2 billion or 43 cents per share compared with $2.3 billion or 42 cents in the year-ago quarter. On a pro-forma basis, Cisco generated adjusted net profit of $2.58 billion compared with $2.65 billion in the year-ago quarter.
Our pro-forma figure excludes certain one-time items but includes stock-based compensation expenses.
Balance Sheet
Cisco ended the fourth quarter with cash and investments balance of $52.1 billion, up $1.6 billion from the previous quarter. Trade receivables were $5.2 billion, up from $4.4 billion in the prior quarter. Total debt (short-term and long-term) was $20.9 billion, flat sequentially. Including other long-term liabilities, the debt to total capital ratio was 27.0%.
The company generated operating cash flow of $3.6 billion and spent $0.33 billion on capital expenditure, netting a free cash flow of $3.3 billion.
Share Repurchase & Dividend
During the quarter, Cisco paid dividends worth $974 million.
The company repurchased approximately 61 million shares under the stock repurchase program at an average price of $25.11 per share for an aggregate purchase price of $1.5 billion.
Guidance
For the first quarter of fiscal 2015, Cisco expects revenues to increase in the range from flat to 1% on a year-over-year basis. Non-GAAP gross margin is expected to be within 61–62% and non-GAAP operating margin is expected to be 27.5–28.5% of revenues. The company expects GAAP tax rate of 22%, yielding non-GAAP earnings per share of 51 to 53 cents. The Zacks Consensus Estimate for the upcoming quarter is 47 cents.
Our Take
Despite growing competition from several smaller players, Cisco appears to be strong in its domain. The company reported decent fourth-quarter results with both top- and bottom-line figures beating the Zacks Consensus Estimate, reflecting Cisco's superior strategy and innovation.
Order growth and book-to-bill ratio improved in the reported quarter, indicating better growth environment in the near future. However, the weakness in a few of its product segments, emerging markets weakness and product transition challenges contained growth in the last quarter.
Also, Cisco announced its decision to trim the workforce by nearly 8% to cut costs until the emerging markets could deliver strong growth. Also, this layoff will help the company optimize cost structure and add needed skills to improve growth in new businesses like cloud computing, consulting, managed services and security.
Nevertheless, the continuous dividend payment and share buyback activity indicates that the company is heading toward strong future growth. Though the company's margins have been under pressure, areas like cloud computing, mobile, data center and others are witnessing strong growth, which will likely offset the margin slowdown, going forward.
Cisco shares carry a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Emulex Corp (ELX), Research Frontiers Inc. (REFR) and Garmin Ltd. (GRMN). All these stocks carry a Zacks Rank #2 (Buy).
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