Cisco Systems - Shares Bounce Higher As Chambers Sees Encouraging Signs

| About: Cisco Systems, (CSCO)

Shares of Cisco Systems (NASDAQ:CSCO) are trading with gains of up to 14% in Thursday's trading session. The internet infrastructure giant reported its third quarter earnings on Wednesday after the close.

The company reported solid third quarter results coming in a slightly ahead of consensus estimates. Given the weak results of some of its colleagues in recent weeks, the market was positively surprised by the report.

Third Quarter Results

Cisco Systems generated third quarter revenues of $12.22 billion, up 5.4% on the year before. Revenues were up 1.0% compared to the second quarter and beat consensus estimates of $12.19 billion. Net earnings rose by 14.5% to $2.48 billion. Diluted earnings per share rose by a similar 15.0% to $0.46 per share.

Non-GAAP earnings rose by merely 4.7% to $2.7 billion, coming in at $0.51 per diluted share. Non-GAAP earnings beat consensus estimates of $0.49 per share.

During the quarter, Cisco announced a range of acquisitions which will help the company to achieve its future objectives in new promising markets, as the company diversifies away from routers and switches. The company announced the acquisition of Austrian-based SolveDirect and Cognitive Security. Cisco furthermore paid some $475 million for Intucell and $310 million for Ubiquisys during the quarter. CEO and Chairman John Chambers commented on the developments:

Cisco is executing at a very high level in a slow, but steady economic environment. We are especially pleased with our ninth consecutive record revenue quarter. We are starting to see some good sings in the US and other parts of the world which are encouraging. The pace of changes is increasing and Cisco is well positioned.

A Look Into The Numbers

Cisco is taking advantage from emerging technologies. Third quarter cloud data revenues were up by 77%, while wireless revenues were up by 27%.

Total order intake grew by 4% on the year after two quarters of flat growth, resulting in a book-to-bill ratio exceeding one. Gross margins were solid as well, with non-GAAP margins coming in at 62.1%, up 10 basis points from a year ago, and up 120 basis points on the quarter. Margin expansion was solid, given the 2% decline in switching revenues which tend to carry higher margins.

Growth was supported by a solid performance in the US, with revenues increasing by 7%. Even the public sector reported 5% revenue growth despite the sequestration worries. Asian revenues rose by merely 1% due to a tough comparison in Japan and continued weakness in China. Revenues came in flat in Europe, Middle-East and Africa after witnessing a 6% year-on-year decline in the second quarter.

Looking Into The Fourth Quarter

The company, which has been led by CEO Chambers since 1995, is looking with confidence towards the final quarter of the year. Non-GAAP gross margins are expected to come in between 61 and 62%. Non-GAAP earnings should come in between $0.50 and $0.52 per share, with GAAP earnings seven to ten cents lower. Analysts were looking for earnings of $0.51 per share.

Revenues are expected to increase between 4 and 7% on the year before to $12.16 to $12.51 billion. At the midpoint of the guidance, revenues are expected to rise by 1.0%, thereby trailing consensus estimates of $12.47 billion.

Long term margins will remain somewhat pressurized as Cisco moves away from routers and switchers to servers, which typically carry lower margins.


Cisco Systems ended the quarter with $47.4 billion in cash and equivalents. The company operates with $16.2 billion in short and long term debt, for a solid net cash position of $31.2 billion. Expect more overseas acquisitions, as Cisco only holds $7.9 billion of its cash in the US with the remainder being held abroad.

For the first nine months of its fiscal 2013, Cisco generated revenues of $36.2 billion, up 5.2% on the year before. GAAP earnings rose by 26% to $7.7 billion, coming in at $1.44 per share. The company is on track to generate annual revenues of $48.5 billion on which it could earn $10 billion, or around $1.90 per share on a GAAP basis.

Factoring in Thursday's 12% jump, the market values Cisco at $127 billion, or its operating assets around $96 billion. This values operating assets of the firm at 2.0 times annual revenues and 9-10 times annual earnings.

Cisco currently pays a quarterly dividend of $0.17 per share, for an annual dividend yield of 2.9%.

Some Historical Perspective

Long term holders of Cisco Systems have seen fairly modest returns as the internet giant failed to deliver substantial returns to shareholders over the past decade. Shares are obviously far removed from their highs of $80 during the internet bubble, but the performance over the past decade has been disappointing as well, a reason why Cisco initiated a regular dividend payout in 2011.

Shares reached their post internet-bubble highs around $33 in 2007, but have fallen to merely $15 during the financial crisis. Shares bounced back to $27 in 2010, but have slumped from that point in time. Shares have finally managed to regain some ground over the past year, trading with year to date gains of 21% so far.

Between its fiscal year of 2009 and 2012, Cisco has managed to expand its revenues by a cumulative 28% to $46.1 billion. Earnings rose by a cumulative 31% to little over $8 billion in the meantime. Earnings per share grew a little faster as Cisco retired some 8% of its shares outstanding within the four year period.

Investment Thesis

Investors are pleased with Cisco's latest report. While revenues and earnings came in only a touch above consensus levels, investors were happy with the report. The market has been factoring a small disappointment as many software and network infrastructure companies warned in recent weeks on delays in capital budgeting decisions. Among those hardest hit was Aruba Networks (NASDAQ:ARUN) which fell hard after a bad miss.

Surprisingly were the upbeat comments made by Chambers who saw encouraging signs in the US and even in Europe. The company actually managed to add to its order book during the quarter, with a book-to-bill ratio of 1.01 for the period. Cisco's strong positioning furthermore allows the company to benefit from the increase in data traffic as consumers increasingly use their smartphones and tablets to go online.

On top of the improving operational performance, Cisco is committed to return value to its shareholders. It aims to distribute some 50% of free cash flow generation to its shareholders. Therefore it was able to hike is quarterly dividend by 21% to $0.17 in the past quarter. The company also bought back $860 million worth of shares, repurchasing shares at annual rate of 2.7%.

After years of share price underperformance it seems Cisco has woken up and became more aggressive. As the technological environment keeps changing, Cisco is moving more rapidly and aggressive to avoid a scenario which happened at names like Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ). Cisco is moving quicker by making acquisitions to drive future growth, but also cutting loss making projects including Linksys, the home-router unit and slashing jobs if necessary.

With a sluggish share price in recent years, investors have gotten better value as the company steadily grew revenues and earnings, while repurchasing its own shares. The initiation and recent hike of its quarterly dividend have attracted a broader base of shareholders as well.

Shares continue to offer great appeal despite 20% uptick so far this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.