A month has gone by since the last earnings report for Cisco Systems (CSCO). Shares have added about 8% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
Cisco Systems Beats on Q4 Earnings & Revenues
Cisco Systems reported fourth-quarter fiscal 2019 non-GAAP earnings of 83 cents per share, which beat the Zacks Consensus Estimate by a penny. Further, the figure rose 19% from the year-ago quarter.
Revenues increased 6% year over year, excluding Service Provider Video Software Solutions (“SPVSS”), to $13.428 billion and surpassed the consensus estimate of $13.376 billion. Acquisitions contributed 60 basis points (bps) to the top line in the reported quarter.
Strength witnessed in the company’s Security and Applications segments drove the year-over-year growth. Order strength and improving traction of the subscription-based model were other tailwinds.
Notably, during the second quarter of fiscal 2019 the company completed the divestiture of its SPVSS business.
Products (75% of total revenues) jumped 7% to $10.12 billion.
Services (25%) increased 4% to $3.31 billion, driven by growth in software and solutions services.
Revenues from subscriptions represent 70% of the company’s software revenues, up 12 bps year over year.
Deferred product revenues were $6.6 billion, down 18% from the year-ago quarter. Deferred service revenues were $11.7 billion, up 2%.
Region wise, Americas and EMEA revenues increased 9% and 7% year over year, respectively. However, revenues from APJC decreased 4%. Total emerging markets declined 8% and the BRICs plus Mexico fell 20%.
In terms of customer segments, enterprise decreased 2%, and service provider was down 21%. However, commercial and public sector rose 7% and 13%, respectively.
Total product orders were flat on a year-over-year basis. Cisco has realigned Product segments into four categories — infrastructure platform, applications, security, and other.
Wireless, Switching Aid Growth
Infrastructure Platforms (58.6% of fiscal fourth-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues grew 6% from the year-ago quarter to $7.876 billion.
The year-over-year increase can primarily be attributed to robust growth across switching, wireless and data center business. Switching revenues witnessed robust growth across campus and data center. Adoption of new campus switch, Cat9K and Nexus 9K was impressive.
Further, wireless revenues improved on the back of company’s Wave 2 offerings and Meraki solution. Robust demand for the HyperFlex data-center solution drove data center’s double-digit growth. However, routing declined mainly due to softness in service provider.
Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by several customers, which aided them in becoming more flexible. Moreover, results benefited from persistent customer shift from 100G to 400G architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.
AppDynamics Drives Growth
Applications (11% of fiscal fourth-quarter revenues) consist of Collaboration portfolio of Unified Communications (“UC”), Conferencing and TelePresence, IoT and application software businesses such as AppDynamics and Jasper. Revenues increased 11% from the year-ago quarter to $1.487 billion.
The company had integrated its Cisco Spark with Webex Platform, which enhanced Webex Meeting and enabled it to introduce Webex Teams, fortifying the company’s collaboration portfolio further.
Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.
Cisco recently unveiled AIOps, leveraging AI, ML and automation to offer enhanced customer experiences and higher business performance.
Security Remains Strong
Security (5% of revenues) climbed 14% to $714 million. The growth can be attributed to solid demand witnessed by web security, unified threat, network security and advanced threat solutions.
The company is striving to leverage ML to deploy security platforms in order to mitigate online risks on a real-time basis.
Other Products segment contains service provider video, cloud and system management and various emerging technology offerings. Revenues declined 4% to $42 million.
Acquisition: A Key Catalyst
On Jul 9, 2019, Cisco expressed its intention to acquire Acacia Communications, an optical networking technology company, for $2.6 billion in cash and marketable securities. Cisco anticipates the acquisition to close in the second half of next year subject to customary closing conditions. Post the deal closure, Acacia will join Cisco's Optical Systems and Optics group — networking and security business.
Cisco also concluded the deal to buy Luxtera. The company intends to deploy Luxtera’s integrated optics technology capabilities across its robust network portfolio featuring capacities ranging from 100GbE (Gigabit Ethernet) to 400GbE. This will enable Cisco to provide ultra-high, data-heavy bandwidth services to CSPs and network service providers.
Further, the deal will help Cisco to add more vital technology to its open-source software in order to build networking machinery.
The company also announced that it has successfully closed the buyout of privately-held Duo Security. Further, the integration of Duo’s zero trust MFA technology with Cisco’s network and cloud security platforms is likely to enhance security features and mitigate phishing incidents on devices. This buyout will aid Cisco to deliver on its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.
Non-GAAP gross margin expanded 230 bps from the year-ago quarter to 65.5%. On a non-GAAP basis, product gross margin and service gross margin came in at 64.7% and 67.9%, compared with 61.9% and 67.2% reported a year ago, respectively.
Non-GAAP operating expenses were $4.4 billion, up 11% year over year. As a percentage of revenues, operating expenses expanded 80 bps to 32.8%.
Non-GAAP operating margin was up 140 bps year over year to 32.6%.
Balance Sheet and Cash Flow
Cisco exited the fiscal fourth quarter with cash & cash equivalents and investments balance of almost $33.41 billion, down from $34.64 billion in the prior-year quarter. Total debt (short plus long) was $24.67 billion compared with $23.69 billion in the previous quarter.
The company generated $3.9 billion cash flow from operations during the quarter under review.
In the fiscal fourth quarter, Cisco returned 6 billion shares to shareholders in the form of share repurchase and dividend.
Furthermore, the company declared a quarterly dividend of 35 cents per share.
For first-quarter fiscal 2020, revenues are expected to grow 0-2% on a year-over-year basis. Non-GAAP earnings are anticipated between 80 cents and 82 cents per share.
Non-GAAP gross margin is expected in the range of 64-65%, while operating margin is anticipated between 32% and 33% for the quarter.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
Currently, Cisco has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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. Notably, Cisco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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