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Cisco (CSCO) Q2 Earnings and Revenues Surpass Estimates

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Zacks Equity Research
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Cisco Systems CSCO reported second-quarter fiscal 2021 non-GAAP earnings of 79 cents per share that beat the Zacks Consensus Estimate by 3.95%. Moreover, the bottom line improved 2.6% year over year. Non-GAAP earnings were anticipated between 74 cents and 76 cents per share.

Revenues declined 0.4% year over year to $11.96 billion but surpassed the consensus mark by 0.31%. Nevertheless, gradual recovery in key product verticals and sequential growth rate improvement across EMEA and APJC limited the decline. For second-quarter fiscal 2021, revenues were anticipated to indicate growth in the range of 0-(2%) on a year-over-year basis.

Quarter in Detail

Region-wise, the Americas and the APJC revenues decreased 1% and 4% year over year to $6.969 billion and $1.784 billion, respectively. EMEA revenues improved 2% to $3.207 billion. Americas, EMEA and APJC contributed 58%, 27% and 15%, respectively, to total revenues.

Service revenues (28% of total revenues) improved 2% year over year to $3.388 billion, driven by growth in maintenance business, software, and solution support services. Software subscriptions represent 76% of Cisco’s software revenues, up 4% year over year.

Product revenues (72% of total revenues) declined 1% on a year-over-year basis to $8.572 billion.

Total product orders were improved 1% on a year-over-year basis. In terms of customer segments, product orders from public sector, commercial, and service provider were up 10%, 1% and 5%, respectively. Enterprise orders were down 9%.

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

Region-wise, Americas and APJC product orders decreased 1% and 5%, respectively, on a year-over-year basis. EMEA product orders improved 7%. Product orders across total emerging markets declined 14%, while the BRICs plus Mexico fell 11%.

Breakup of Product Revenues

Infrastructure Platforms (74.5% of Product revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues fell 3% year over year to $6.391 billion. The segment was severely impacted by coronavirus crisis-induced softness in the enterprise markets, which led to declines across routing, and data center verticals.

Switching revenues remained flat with solid growth in data center switching and strong demand for Catalyst 9000 and Nexus 9000 family of switches. In wireless vertical, the company gained from ramping up Wi-Fi 6 products and solid growth in Meraki solutions. Data Center revenues decreased due to weak demand environment for server products. Routing revenues declined on account of weakness across service provider vertical.

Applications (16% 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 remained flat on a year-over-year basis to $1.354 billion, due to a decline in Unified Communications and TP end points, offset by double-digit growth in Webex.

Notably, robust adoption of Webex video conferencing and business productivity offerings amid the COVID-19 induced work-from-home demand environment mitigated the decline. WebEx is facilitating around 600 million quarterly average users to stay connected and productive. 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 act as a tailwind in the days ahead.

Security (9.5% of Product revenues) revenues improved 10% to $822 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. Management is optimistic regarding the solution as over 5,400 customers are leveraging the platform since its availability in June, 2020.

Cisco witnessed double-digit growth 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 identity and access, advanced threat, and unified threat management solutions.

The company also benefited from shift to cloud-based security capabilities and growing clout of Secure Remote Worker, which leverages Zero Trust Architecture, integrated with robust endpoint security portfolio of AnyConnect, Umbrella, Duo and AMP for Endpoints.

Other Products contains service provider video, cloud and system management, and various emerging technology offerings. Revenues slumped 39% to $4 million.

Acquisitions

During the fiscal second quarter, Cisco announced its intent to acquire Dashbase, which is an enterprise software provider. Dashbase technology will be combined with its AppDynamics platform to ramp up digital acceleration for customers.

The company also disclosed its plans to acquire U.K.-based IMImobile PLC, in a deal worth $730 million, to boost its Customer Experience as a Service (CXaaS) offerings.

Moreover, Cisco announced the acquisition of Slido s.r.o. for an undisclosed amount with an aim to augment Webex experience.

Operating Details

Non-GAAP gross margin expanded 50 basis points (bps) from the year-ago quarter to 66.9%. On a non-GAAP basis, product gross margin expanded 70 bps to 66.6%, while service gross margin expanded 20 bps to 67.9%.

Non-GAAP operating expenses were $3.896 billion, down 1% year over year. As a percentage of revenues, operating expenses contracted 10 bps to 32.6%.

Non-GAAP operating margin expanded 70 bps year over year to 34.4%.

Balance Sheet and Cash Flow

As of Jan 23, 2021, Cisco’s cash & cash equivalents and investments balance were $30.6 billion, compared with $30 billion as of Oct 24, 2020.

Total debt (short-term plus long-term), as of Jan 23, was $14.554 billion compared with $11.86 billion, as of Oct 24.

Operating cash flow was $3 billion compared with $4.1 billion reported in the prior quarter.

In the fiscal second quarter, Cisco returned $2.3 billion to shareholders, which includes dividend payments of $1.5 billion and share repurchases worth $801 million. Notably, the company has $9.2 billion remaining under its current share buyback program with no termination date.

Remaining performance obligations (RPO) at the end of the fiscal second quarter were $28.2 billion, up 13%. The metric represents total committed non-cancelable future revenues.

Q3 Guidance

For third-quarter fiscal 2021, revenues are expected to indicate growth in the range of 3.5-5.5% on a year-over-year basis. The Zacks Consensus Estimate for revenues is pegged at $12.34 billion, indicating year-over-year growth of 3%.

Non-GAAP earnings are anticipated between 80 cents and 82 cents per share. The Zacks Consensus Estimate for earnings stands at 82 cents per share.

Notably, non-GAAP gross margin is expected to be 65-66%, while operating margin is anticipated between 33% and 34% for the quarter.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the broader technology sector are Shopify SHOP, CrowdStrike CRWD and Workday WDAY. Shopify flaunts a Zacks Rank #1 (Strong Buy), while CrowdStrike and Workday carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shopify, Workday and CrowdStrike are scheduled to release earnings on Feb 17, Feb 25 and Mar 16, respectively.

Long-term earnings growth rate for Shopify, CrowdStrike and Workday are currently pegged at 32.5%, 25%, and 25.4%, respectively.

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