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Dow 30 Earnings: Cisco Systems - Fiscal First Quarter 2012
Cisco Systems (CSCO - Free Cisco Stock Report), a leading networking equipment maker, has reported solid fiscal first-quarter (ended October 29th) results, demonstrating progress in its efforts to improve its top- and bottom-line growth. Management mentioned that the vast majority of its restructuring activities (reduced headcount, early retirement program, and a more streamlined management hierarchy and product approval process) are now complete, which we believe contributed to the favorable results. The stock rose sharply on the news.
Revenues advanced a healthy 5%, year over year, which compared favorably to the 1% to 4% increase management had been forecasting. Although comparisons were relatively easy, the company managed to increase revenues on a sequential basis during a quarter that usually experiences a seasonal decline. GAAP earnings per share of $0.33 were a penny below our estimate.
On a geographic basis, orders in the Americas advanced 12%, year over year, and the Europe, Middle East, and Africa regions, as well as Asia/Pacific, saw orders rise 13%. Management cautioned that going forward, demand in Europe may be uneven, however.
Looking at customer segments, orders from enterprises, commercial, and service providers were up 11%, 12%, and 16%, respectively. The surprising result was public sector orders, which advanced 10%, as solid demand from federal defense, state governments, and higher education institutions was enough to offset weakness from federal civilian, local governments, and K-12 customers. Although encouraging, we remain somewhat concerned over the effect that potential budget cuts may have on near-term demand from the public sector.
Switching revenues were flat compared to last year, and Cisco is seeing stability in its market share and overall demand. The unit's orders were up 10% in the term. Meanwhile, Routing saw its revenue contribution tumble 3%, as a 4% climb in high-end routers was not enough to offset a 16% decline in sales of the mid- to low-end variety. We attribute the fall to more routing functionality being designed into adjacent products like high-end switches. On the other hand, the Services unit was the best performer out of Cisco's core operating groups, with revenues and orders up 12% and 16%, respectively.
Revenues and orders for newer businesses, like collaboration, TelePresence, and Unified Communications did well, as they all recorded mid-teens advances. The company appears to be gaining market share in its video-related products.
Meantime, data center and Unified Computing System sales were particularly strong, advancing 116% and reaching a $1 billion annualized revenue run rate. This is an encouraging sign considering that Cisco is still relatively new to the field where it competes with industry heavyweights like International Business Machines (IBM - Free IBM Stock Report) and Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report). We think the top line will continue to benefit from the convergence of server, processing, networking, and storage into the cloud. However, the company's data center gear carries relatively low margins and may well continue to be a drag on profitability as it makes up a larger percentage of the sales mix.
This trend contributed to the product gross margin falling 270 basis points, year over year, to 61.3% in the October term. Fierce pricing competition with Huawei in the Chinese router market was also a cause of the margin compression. On the bright side, the Switching unit's profitability has rebounded back to last year's level, which we attribute to the refreshed product line and higher volumes, offset by increased discounting. We expect “value” engineering and supply chain efficiencies to eventually help profitability regain some of the nearly four percentage points of margin contraction Cisco has experienced in its transition period. Still, this will likely take some time, and management expects the gross margin to be 61.5% to 62.0% in the January period.
Although the majority of the $1.3 billion in restructuring charges have already been realized, there should be some lingering charges going forward. Plans to reduce costs by $1.0 billion to offset this are going well, and should be complete within the next six months.
Management indicated that revenues will likely climb 7%-8% in the January period, and we are leaving our estimate unchanged at $11.2 billion (up 7.6%). We are also leaving our fiscal 2012 bottom-line target intact at $1.35 a share.
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.