Telecommunications and network equipment maker Cisco (CSCO) reported surprisingly strong results for its fiscal year 2013 first quarter. Net sales jumped 6% year-over-year to $11.9 billion, exceeding consensus expectations. Earnings were also better than the consensus forecast, growing 12% year-over-year to $0.48 per share on a non-GAAP basis. For a read on how we calculate the intrinsic value of Cisco and hundreds of other firms in our coverage universe, please click here.
High-margin service revenue was a major growth driver, surging 12% year-over-year to $2.6 billion, while product revenue increased 4% year-over-year to $9.3 billion. Since margins on service revenue are greater than those of product revenue, we welcome the shift in product mix towards services. SG&A also declined 150 basis points to 32%, and R&D remained flat at 15.4% of sales.
Geographically, the Americas were relatively strong, growing 7% year-over-year driven by strength in the United States. US enterprise group orders grew 9%, US service provider orders grew 13%, and US commercial orders grew 5%. Asia-Pacific, Japan and China were also strong (in aggregate), growing revenue 10% year-over-year. Yet, most of this growth was driven by solid performance in India, which grew over 50%. Revenue from China, however, was essentially flat, consistent with the weakness we've seen in investment spending in the country recently. However, Cisco indicated that it is taking share from rivals Juniper Networks (JNPR) and HP (HPQ) in the country. Europe, Middle-East, and Africa (EMEA) remained weak, with revenue coming in flat year-over-year. However, orders in the region declined 10%, reflecting the challenging road that lies ahead.
Enterprise spending continues to be lumpy, with US enterprises and service providers increasing network infrastructure spending, while Europe remains weak. Management appears somewhat optimistic about the US going forward (assuming resolution with the fiscal cliff), though we think CEO John Chambers may be overconfident about Congress' ability to come to a resolution in a timely manner. The company isn't very optimistic about Europe turning in the near term, indicating that it will get worse before it gets better.
Cisco continues to generate huge amounts of cash, pulling in $2.5 billion in operating cash flow during the quarter, while returning $1 billion in cash via share repurchases and dividends. Cash and equivalents now total about $45 billion, with the company showing surprising willingness to repatriate cash to the United States. We don't see the firm making any transformative acquisitions, but instead, we think the firm will continue to return cash to shareholders and make incremental organic investments. That's why Cisco has a great score on our Valuentum Dividend Cushion.
We were pleasantly surprised by the upside in network spending, especially since we've seen firms such as Emerson (EMR) and Alcatel Lucent (ALU) cite a lack of telecom spending for their poor results. We think this signals that Cisco has the "right" product mix. The firm continues to build on data center partnerships with the likes of EMC and Citrix, and it hopes to partner with tech giants like IBM and Microsoft - two firms that we think will remain big winners in the enterprise data market.
For its second quarter, the company expects to earn $0.47-$0.48 per share, roughly flat year-over-year, on 3.5%-5.5% revenue growth. Both figures are roughly in-line with consensus estimates, and achievable, in our view. While shares don't score high enough on our Valuentum Buying Index (our stock-selection methodology) to warrant a position in our Best Ideas Newsletter, the firm is on our radar, and we think it could be an attractive addition to our Dividend Growth Newsletter portfolio at the right price.