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Cisco (CSCO) Q1 Earnings Beat, Stock Up on Promising Q2 View

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Zacks Equity Research
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Cisco Systems CSCO reported first-quarter fiscal 2021 non-GAAP earnings of 76 cents per share that beat the Zacks Consensus Estimate by 7%. However, the bottom line declined 10% year over year.

Revenues declined 9% year over year to $11.93 billion but surpassed the consensus mark of $11.88 billion. The decline can be attributed to coronavirus crisis-induced weakness in the enterprise and commercial markets.

Shares Up on Encouraging Q2 Guidance

Cisco’s shares are up more than 7% in the pre-market on Nov 13, after the company reported better-than-expected fiscal first-quarter results and provided upbeat fiscal second-quarter guidance.

For second-quarter fiscal 2021, revenues are expected to indicate growth in the range of 0-(2%) on a year-over-year basis. The Zacks Consensus Estimate for revenues is pegged at $11.58 billion, indicating a year-over-year decline of 3.5%.

Non-GAAP earnings are anticipated between 74 cents and 76 cents per share. The Zacks Consensus Estimate for earnings is pegged at 73 cents per share.

On a year-to-date basis, Cisco’s stock has fallen 19.3% year to date, compared with the industry’s decline of 19.2%.



Notably, non-GAAP gross margin is expected to be 64-65%, while operating margin is anticipated between 32% and 33% for the quarter.

Quarter in Detail

Region-wise, the Americas, the EMEA and the APJC revenues decreased 10%, 10% and 7% year over year to $7.2 billion, $2.96 billion and $1.77 billion, respectively. Americas, EMEA and APJC contributed 60.3%, 24.8% and 14.8%, respectively, to total revenues.

Service revenues (28% of total revenues) improved 2% year over year to $3.34 billion, driven by growth in software and solution services. Software subscriptions represent 78% of Cisco’s software revenues, up 7% year over year.

Product revenues (72% of total revenues) declined 13% on a year-over-year basis to $8.59 billion.

Total product orders were down 5% on a year-over-year basis. In terms of customer segments, product orders for public sector was up 5%. Commercial, enterprise and service provider revenues were down 8%, 15% and 5%, respectively.

Region-wise, Americas, EMEA and APJC product orders decreased 5%, 1% and 14%, respectively, on a year-over-year basis. Product orders across total emerging markets declined 15%, while the BRICs plus Mexico fell 19%.

Breakup of Product Revenues

Infrastructure Platforms (73.8% of Product revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues fell 16% year over year to $6.34 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. The company also gained from ramping up WiFi 6 products. Data Center revenues decreased due to weak demand environment for server products.

Applications (16.1% of Product revenues) comprises the Collaboration portfolio of Unified Communications (UC), Conferencing and TelePresence(or TP), IoT, and application software businesses such as AppDynamics and Jasper. Revenues decreased 8% year over year to $1.38 billion due to a decline in Unified Communications and TP end points, partially offset by solid growth in Webex.

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 momentum to continue across new offerings, including Webex Room Navigator that facilitates return to office solutions and Webex Legislate aimed at supporting vital functions of global governments. This is expected to be a tailwind, going ahead.

Security (10% of Product revenues) revenues improved 6% to $861 million. The upside can be attributed to solid demand witnessed by 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.

Cisco witnessed strong demand for cloud-based solutions, including AnyConnect, 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 identity and access, advanced threat, and unified threat management solutions amid high growth in Internet traffic.

The company also benefited from shift to cloud-based security capabilities and growing clout of Secure Remote Worker, which leverages Zero Trust Architecture, combined with robust endpoint security portfolio of AnyConnect, Umbrella, Duo and AMP for Endpoints.
 
Other Products (0.1% of Product revenues) contains service provider video, cloud and system management, and various emerging technology offerings. Revenues slumped 56% to $5 million.

Acquisitions

During the reported quarter, the company declared its plans to acquire BabbleLabs. The deal will enable Cisco to address to improve Webex video experience. Markedly, Webex is witnessing increased demand triggered from COVID-19 outbreak-induced dependence on the Internet for video conferencing and accelerated cloud adoption amid workspace collaboration.
 

Cisco Systems, Inc. Price, Consensus and EPS Surprise

Cisco Systems, Inc. Price, Consensus and EPS Surprise
Cisco Systems, Inc. Price, Consensus and EPS Surprise

Cisco Systems, Inc. price-consensus-eps-surprise-chart | Cisco Systems, Inc. Quote

The company also announced its plan to acquire Portshift, in a bid to boost security for Kubernetes-based cloud native applications. However, the financial terms of the deal have been kept under wraps.

Operating Details

Non-GAAP gross margin contracted 10 basis points (bps) from the year-ago quarter to 65.8%. On a non-GAAP basis, product gross margin contracted 80 bps to 65.3%, while service gross margin expanded 170 bps to 67.1%.

Non-GAAP operating expenses were $3.95 billion, down 7.2% year over year. As a percentage of revenues, operating expenses expanded 70 bps to 33.1%.

Non-GAAP operating margin contracted 90 bps year over year to 32.7%.

Balance Sheet and Cash Flow

As of Oct 24, 2020, Cisco’s cash & cash equivalents and investments balance were $30 billion, compared with $29.4 billion as of Jul 25, 2020.

Total debt (short-term plus long-term), as of Oct 24, was $11.86 billion compared with $14.6 billion, as of Jul 25.

Operating cash flow was $4.1 billion compared with $3.8 billion reported in the prior quarter.

In the fiscal first quarter, Cisco returned $2.3 billion to shareholders, which includes dividend payments of $1.5 billion and share repurchases worth $800 million. Notably, the company has $10 billion remaining under its current share buyback program with no termination date.

Remaining performance obligations (RPO) at the end of the fiscal first quarter were $27.5 billion, up 10%. The metric represents total committed non-cancelable future revenues.

Zacks Rank & Key Picks

Cisco currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Jabil JBL, Cadence Design Systems CDNS and NVIDIA NVDA. While Jabil sports a Zacks Rank #1 (Strong Buy), Cadence and NVIDIA carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Jabil, Cadence and NVIDIA is currently 12%, 15.4%, and 20.1%, respectively.

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