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Dow-30 Earnings: Cisco Systems - Fiscal Fourth Quarter 2013
Cisco Systems (CSCO - Free Cisco Stock Report), the world's largest networking equipment maker and a Dow-30 component, has reported fiscal fourth-quarter results (ended July 27, 2013) that were in line with our expectations. Revenues advanced 6% year over year, and non-GAAP earnings per share of $0.52 matched our estimate.
The company's guidance for the first fiscal quarter was not particularly encouraging, however. The company is calling for top-line growth of 3%-5%, in contrast to Wall Street's consensus estimate of 5%. Earnings per share guidance of $0.50-$0.51 was close to our estimate of $0.52, and we are leaving our fiscal 2014 earnings per share estimate of $2.20 (10% year-over-year growth) intact at this juncture. Product margins should remain in the 61%-62% range. The long-term revenue growth target of 5% to 7% remains below the earnings per share growth target of 7% to 9%.
The big news from the release is that management has chosen to pare its workforce by 4,000 employees, or approximately 5% of its global total. Although significant progress has been made on a recovery, Cisco says the pace is not where it needs to be. Asia’s markets have experienced weakness of late and emerging markets have been inconsistent. Further, we think the company has put pressure on itself to live up to its promise of increasing earnings faster than revenues. Cisco expects to incur restructuring charges of $550 million, $250 million to $350 million of which should be realized in the first quarter, with the rest coming over the remainder of fiscal 2014.
Taking a look at each division’s performance, the Switching segment was up 5%, with new products rising over 20%. This all came despite the recent introduction of new technologies and competitors in the space. Routing did not fare as well, though, with the top-line coming in flat. While edge routers did well, core routers saw weakness, similar to the experience of its peers. The Wireless business stood out, growing revenues 32%, thanks partly to the cloud networking business. Initial sales of fifth-generation Wi-Fi (802.11ac) products were also strong. Despite having a difficult comparison, Data Center revenues increased 43% thanks to growth across all regions. Service provider video was up 23% driven by an acquisition. We think this part of the business may come under pressure in the coming quarters as set-top boxes become increasingly commoditized. Rounding out the product performance were flat results for both the Security and Collaboration arms. Services, on the other hand, gained 6% and represented 22% of total revenues. Cisco remains committed to growing this business in the 9% to 11% range over the long haul.
The order book had pockets of weakness due to an “inconsistent global macro environment.” In the U.S., enterprise business rose 9%; commercial was up 12%; and the public sector advanced 4% thanks to state and local governments, education, and an uptick in federal spending. U.S. service provider was down slightly. The Europe, Middle East, Africa, and Russia division grew 6% and Europe, itself, was up the same despite weak enterprise spending. Still, the company remains cautious about Southern Europe. Economic challenges in several countries in Asia have hurt orders, and a few of the top-5 emerging markets were weak. Overall, CEO John Chambers thinks the recovery is more mixed and inconsistent than others he has seen. Nonetheless, the book-to-bill ratio is now above one and the product backlog of $5 billion was similar to last year during this time.
Overall, this earnings report was rather pedestrian, and we think the stock may become range bound over the near term while the dust settles on the restructuring. Long term we still think the company has solid potential for risk-adjusted price appreciation.
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.