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Dow-30 Earnings: Cisco Systems - Fiscal Third Quarter 2012
Networking equipment bellwether and Dow-30 component Cisco Systems (CSCO - Free Cisco Stock Report) has reported record earnings and revenues for the fiscal third quarter (ended April 28th), despite facing a cautious information technology (IT) spending environment. The top line advanced 7%, year over year, to $11.6 billion, matching our estimate. GAAP earnings rose 14% from the year-earlier period, and the result was the same on an adjusted basis, which excludes expenses for noncash stock-based compensation and the amortization of intangibles. Despite the solid April-period results, the company's outlook disappointed investors, who bid the stock sharply lower on the report.
Sales to service providers made up approximately one third of the total and grew 5%, year over year, despite tight capital expenditure budgets. This result was better than that of rival Juniper Networks (JNPR), which saw overall sales drop 6% and routing revenues fall 20% in its most recent quarter. Cisco's other major competitor, Alcatel-Lucent (ALU), experienced a revenue decline of 12%, while China’s low-cost vendor, Huawei's, top line was only up 3%. These results indicate that Cisco is gaining market share.
Looking at specific product categories, Switching was up 5% and the gross margin remained stable. This had been a major area of concern last year, but the profitability gap between high-end and mid-range switches has narrowed nine percentage points since then, thanks largely to “value engineering”. To be sure, the transition from 1 Gig Ethernet to 10 Gig Ethernet architecture in data centers is also helping the average selling price of Switching products.
Elsewhere, Routing sales were flat as solid demand for high-end products was offset by a downturn in optical. Data center revenues were up 67%, thanks to good orders from enterprises and Web 2.0 companies. Still, the Collaboration unit delivered disappointing results, due to weak demand for Telepresence systems from the public and enterprise sectors.
From a geographical perspective, sales to the Americas were up 3%; the region comprised of Europe, the Middle East, and Africa advanced 5%; and Asia/Pacific grew a whopping 24%, due to several large multi-year projects that we do not expect to repeat in the current period.
Cisco's guidance left much to be desired, however. Revenue growth is expected to be in the range of 2% to 5% in the July period, which implies that product revenues will decline in the low-single-digit range sequentially. Although customers generally expect to spend more in the second half of the calendar year, Cisco's management revealed that its expectations are being curbed by the economic situation in Europe.
We believe the market's reaction to this outlook may be overly severe. The company's strong sales execution, breadth and quality of its product portfolio, strong customer relationships, and more streamlined cost base may prove enough to counter the negative impact of Europe and potential weakness from the public sector. As a result, we are leaving our fiscal 2012 and 2013 share-earnings estimates intact at $1.50 and $1.70, respectively. Likewise, our revenue forecasts for this fiscal year and next remain unchanged at $46.5 billion and $49.5 billion.
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.