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A month has gone by since the last earnings report for Cisco Systems (CSCO). Shares have added about 0.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Cisco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Cisco Q3 Earnings and Revenues Top Estimates
Cisco Systems reported third-quarter fiscal 2021 non-GAAP earnings of 83 cents per share that beat the Zacks Consensus Estimate by 1.2%. Moreover, the bottom line increased 5% year over year. Non-GAAP earnings were anticipated between 80 cents and 82 cents per share.
Revenues rose 7% year over year to $12.8 billion and surpassed the consensus mark by 1.8%. The top line was driven by strength across portfolio and revenue growth in all geographies. For third-quarter fiscal 2021, revenues were anticipated to indicate growth in the range of 3.5-5.5% on a year-over-year basis.
Quarter in Detail
Region-wise, the Americas and the APJC revenues increased 2% and 19% year over year to $7.262 billion and $2.057 billion, respectively. EMEA revenues rose 11% to $3.483 billion. Americas, EMEA and APJC contributed 57%, 27% and 16%, respectively, to total revenues.
Service revenues (28.6% of total revenues) increased 8% year over year to $3.664 billion, driven by growth in maintenance business, software and solution support services. Software subscriptions represent 81% of Cisco’s software revenues.
Product revenues (71.4% of total revenues) increased 6% on a year-over-year basis to $9.139 billion. The upside can be attributed to broad-based strength across portfolio as well as due to buy out of Acacia Communications.
Total product orders were improved 10% on a year-over-year basis. In terms of customer segments, product orders from public sector, commercial and service provider were up 11%, 16% and 17%, respectively. Enterprise orders were flat on a year-over-year basis.
Region-wise, Americas, EMEA and APJC product orders increased 6%, 10% and 31%, respectively, on a year-over-year basis. Product orders across total emerging markets were up 13%, while the BRICs plus Mexico jumped 31%.
Breakup of Product Revenues
Infrastructure Platforms (74.8% of Product revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues increased 6% year over year to $6.832 billion.
Switching revenues improved in the quarter under review with double-digit growth for Catalyst 9000 family of switches. In wireless vertical, the company gained from ramping up Wi-Fi 6 products and solid growth in Meraki solutions. Routing revenues increased in double digits backed by strength across service provider vertical. However, Data Center revenues declined due to weak demand environment for server products.
Applications (15.6% of Product revenues) includes the Collaboration portfolio of Unified Communications (UC), Conferencing and TelePresence (or TP), IoT and application software businesses such as AppDynamics and Jasper. Revenues increased 5% on a year-over-year basis to $1.426 billion, owing to double-digit growth in Webex along with growth witnessed in unified communications, IoT software and AppDynamics. However, decline in telepresence endpoints acted as the headwind in the quarter under review.
Notably, robust adoption of Webex video conferencing and business productivity offerings amid the COVID-19 induced work-from-home demand environment is driving the segment’s top line. Moreover, momentum across new offerings, including Webex Room Navigator that expedites return to office solutions and Webex Legislate aimed at supporting vital functions of global governments, is expected to act as a tailwind in the days ahead.
Security (9.6% of Product revenues) revenues improved 13% to $876 million driven by expanding clientele. The company continues to witness solid demand for SecureX offering — a comprehensive cloud-based security platform — to strengthen enterprise security infrastructure with unified visibility, automation and security capabilities across network endpoints, applications and the cloud. Management is optimistic regarding the solution as more than 7,000 customers are leveraging the platform since its availability in June 2020.
Cisco witnessed double-digit growth for cloud-based security solutions, and strong momentum for Duo and Umbrella solutions. The company’s differentiated end-to-end approach across the network, cloud and endpoints has helped it expand clientele. The company is witnessing momentum in identity and access, advanced threat as well as unified threat management solutions.
Other Products contains service provider video, cloud and system management, and various emerging technology offerings. Revenues slumped 34% to $6 million.
During the fiscal third quarter, Cisco completed the buyout of Acacia Communications for nearly $4.5 billion. Cisco aims to expand optical systems portfolio, especially coherent optical solutions to support its “Internet for the Future” strategy with Acacia buyout.
Cisco concluded the buyout of U.K.-based IMImobile PLC for nearly $730 million. The acquisition will boost its Customer Experience as a Service (CXaaS) offerings. Cisco also completed the acquisition of enterprise software company — Dashbase — in the fiscal third quarter.
Non-GAAP gross margin contracted 60 basis points (bps) from the year-ago quarter’s level to 66%.
On a non-GAAP basis, product gross margin contracted 90 bps to 64.9%, while service gross margin shrank 20 bps to 68.7%.
Non-GAAP operating expenses were $4.148 billion, up 9% year over year. As a percentage of revenues, operating expenses expanded 60 bps to 32.4%.
Non-GAAP operating margin contracted 130 bps year over year to 33.6%.
Balance Sheet and Cash Flow
As of May 1, 2021, Cisco’s cash & cash equivalents and investments balance were $23.6 billion, compared with $30.6 billion as of Jan 23, 2021.
Total debt (short-term plus long-term), as of May 1, was $11.532 billion compared with $14.554 billion, as of Jan 23.
Cash flow from operating activities was $3.9 billion compared with $3 billion reported in the prior quarter.
In the fiscal third quarter, Cisco returned $2.1 billion to shareholders, which includes dividend payments of $1.6 billion and share repurchases worth $510 million. Notably, the company has $8.7 billion remaining under its current share buyback program with no termination date.
Remaining performance obligations (RPO) at the end of the fiscal third quarter were $28.1 billion, up 10%. The metric represents total committed non-cancelable future revenues.
For fourth-quarter fiscal 2021, revenues are expected to indicate growth in the range of 6-8% on a year-over-year basis.
Non-GAAP earnings are anticipated between 81 cents and 83 cents per share.
Notably, non-GAAP gross margin is expected to be 64-65%, while operating margin is anticipated between 32% and 33% for the quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Cisco has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Cisco has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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