It has been about a month since the last earnings report for Cisco Systems (CSCO). Shares have lost about 7.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Cisco due for a breakout? 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 Q4 Earnings & Revenues Beat Estimates
Cisco Systems reported fourth-quarter fiscal 2020 non-GAAP earnings of 80 cents per share that beat the Zacks Consensus Estimate by 8.1%. However, the bottom line declined 4% year over year.
Revenues declined 9% year over year to $12.15 billion but surpassed the consensus mark by 0.5%. The decline can be attributed to coronavirus crisis-induced weakness in the enterprise and commercial markets.
Quarter in Detail
Region-wise, the Americas, the EMEA and the APJC revenues decreased 12%, 6% and 7% year over year to $7.19 billion, $3.11 billion and $1.86 billion, respectively. Americas, EMEA and APJC contributed 59.1%, 25.6% and 15.3%, respectively, to total revenues.
Service revenues (27.3% of total revenues) remained flat at $3.32 billion, driven by growth in software and solution services. Software subscriptions represent 78% of Cisco’s software revenues, up 8% year over year.
Product revenues (72.7% of total revenues) declined 13% on a year-over-year basis to $8.83 billion.
Total product orders were down 10% on a year-over-year basis. In terms of customer segments, product orders for public sector was down 1%. Commercial, enterprise and service provider revenues were down 23%, 7% and 5%, respectively.
Region-wise, Americas, EMEA and APJC product orders decreased 11%, 6% and 13%, respectively, on a year-over-year basis. Product orders across total emerging markets declined 19%, while the BRICs plus Mexico fell 26%.
Breakup of Product Revenues
Infrastructure Platforms (75% of Product revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues fell 16% year over year to $6.63 billion. The segment was severely impacted by coronavirus crisis-induced softness in the commercial and enterprise markets, which led to declines across routing, switching, data center, and wireless verticals.
However, Cisco witnessed strong demand for Catalyst 9000 family of switches, which improved in double digits. The company also gained from ramping up WiFi 6 products. Data Center revenues decreased owing to DRAM price declines and weak demand environment.
Applications (15.4% of Product revenues) consist of the Collaboration portfolio of Unified Communications (UC), Conferencing and TelePresence, IoT, and application software businesses such as AppDynamics and Jasper. Revenues decreased 9% year over year to $1.36 billion due to a decline in Unified Communications and TP end points, partially offset by double-digit growth in Webex, and solid uptake of AppDynamics and IoT software.
Notably, robust of Webex video conferencing and business productivity offerings amid the COVID-19 induced work-from-home demand environment mitigated the decline. Management stated that it anticipates the momentum to continue and is witnessing the transformation of free trials into paid subscriptions, which is a positive.
Security (9.2% of Product revenues) revenues improved 10% to $814 million. The upside can be attributed to solid demand witnessed by identity and access, advanced threat, and unified threat management solutions amid high growth in Internet traffic.
Cisco witnessed strong demand for cloud-based solutions, including Duo and Umbrella. 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 latest 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.
The company also introduced Secure Remote Worker, which leverages Zero Trust Architecture, combined with robust endpoint security portfolio of AnyConnect, Umbrella, Duo and AMP for Endpoints.
Other Products (0.4% of Product revenues) contains service provider video, cloud and system management, and various emerging technology offerings. Revenues slumped 17% to $35 million.
Non-GAAP gross margin contracted 50 basis points (bps) from the year-ago quarter to 65%. On a non-GAAP basis, product gross margin contracted 150 bps to 63.2, while service gross margin expanded 190 bps to 69.8%.
Non-GAAP operating expenses were $4.41 billion, down 9% year over year. As a percentage of revenues, operating expenses contracted 80 bps to 32%.
Non-GAAP operating margin expanded 40 bps year over year to 33%.
Balance Sheet and Cash Flow
As of Jul 25, 2020, Cisco’s cash & cash equivalents and investments balance were $29.4 billion, compared with $28.6 billion as of Apr 25, 2020.
Total debt (short-term plus long-term), as of Jul 25, was $14.6 billion compared with $16.1 billion, as of Apr 25.
Operating cash flow was $3.8 billion compared with $4.2 billion reported in the prior quarter.
In the fiscal fourth quarter, Cisco returned $1.5 billion to shareholders through dividends. The company did not repurchase any shares during the reported quarter. Notably, the company has $10.8 billion remaining under its current share buyback program with no termination date.
Remaining performance obligations (RPO) at the end of fiscal 2020 were $28.4 billion, up 12%. The metric represents total committed non-cancelable future revenues.
For first-quarter fiscal 2021, revenues are expected to decline 9-11% on a year-over-year basis.
Non-GAAP earnings are anticipated between 69 cents and 71 cents per share.
Notably, non-GAAP gross margin is expected in the range of 64-65%, while operating margin is anticipated between 30% and 31% for the quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -7.03% due to these changes.
At this time, Cisco has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. 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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