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Summary

  • Earnings increased by 1% although revenue decreased by 5% from last year.
  • The company guided higher for next quarter.
  • The stock is inexpensive based on 2015 earnings estimates.

The last time I wrote about Cisco Systems, Inc. (NASDAQ:CSCO) I stated:

"Due to the bearish technicals, overall market weakness, and the company reporting earnings soon, I will not be pulling the trigger here right now. But the time to buy more shares will be coming soon." Since that article was published the stock is down 0.57% while the S&P 500 (NYSEARCA:SPY) is up 0.39%. Cisco designs, manufactures and sells internet protocol-based networking and other products related to the communications and information technology industry and provides services associated with these products and their use.

The company reported earnings after the market closed on 14May14 and on the surface the results were great with the company reporting earnings of $0.51 per share (beating estimates by $0.03) on revenue of $11.54 billion (beating estimates by $160 million). The stock increased 7.19% in after hours trading and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenues (millions)

3FQ14

2FQ14

3FQ13

Q/Q

Y/Y

Product

$ 8,820

$ 8,423

$ 9,559

5%

-8%

Service

$ 2,725

$ 2,732

$ 2,657

0%

3%

Total

$ 11,545

$ 11,155

$ 12,216

3%

-5%

Compared to last year total revenue was down significantly, by 5%. That shouldn't strike investors as earth shattering though because management warned us previously. But what I notice is that hardware took a severe hit while services increased at a pretty good rate. Hardware is responsible for about 76% of revenues.

Income Statement

Income Statement (millions)

3FQ14

2FQ14

3FQ13

Q/Q

Y/Y

Revenue

$ 11,545

$ 11,155

$ 12,216

3%

-5%

Cost of sales

$ 4,539

$ 5,204

$ 4,705

-13%

-4%

Gross margin

$ 7,006

$ 5,951

$ 7,511

18%

-7%

Research and development

$ 1,565

$ 1,412

$ 1,542

11%

1%

Sales and marketing

$ 2,342

$ 2,277

$ 2,375

3%

-1%

General and administrative

$ 460

$ 451

$ 530

2%

-13%

Amortization of purchased intangible assets

$ 71

$ 71

$ 89

0%

-20%

Restructuring and other charges

$ 26

$ 73

$ 33

-64%

-21%

Operating income

$ 2,542

$ 1,667

$ 2,942

52%

-14%

Interest income

$ 170

$ 169

$ 162

1%

5%

Interest expense

$ (146)

$ (136)

$ (145)

7%

1%

Other income

$ 76

$ 55

$ (14)

38%

-643%

Income before provision for income taxes

$ 2,642

$ 1,755

$ 2,945

51%

-10%

Provision for income taxes

$ 461

$ 326

$ 467

41%

-1%

Net Income

$ 2,181

$ 1,429

$ 2,478

53%

-12%

Non-GAAP Share-based compensation expense

$ 353

$ 52

$ 274

579%

29%

Non-GAAP Amortization of acquisition-related intangible assets

$ 252

$ 182

$ 235

38%

7%

Non-GAAP Supplier component remediation charge

$ 655

-100%

N/A

Non-GAAP Impact to cost of sales from purchase accounting adjustments to inventory

$ -

N/A

N/A

Non-GAAP Share-based compensation expense

$ 296

-100%

N/A

Non-GAAP Amortization of acquisition-related intangible assets

$ 1

$ 71

-99%

N/A

Non-GAAP Acquisition-related/divestiture costs

$ 68

$ 107

$ 16

-36%

325%

Non-GAAP Significant asset impairments and restructurings

$ 26

$ 73

$ (17)

-64%

-253%

Non-GAAP Income tax effect of non-GAAP adjustments

$ (156)

$ (275)

$ (141)

-43%

11%

Non-GAAP Significant tax matters

$ (85)

$ (69)

$ (117)

23%

-27%

Non-GAAP net income

$ 2,640

$ 2,521

$ 2,728

5%

-3%

Diluted shares outstanding

5,180

5,327

5,387

-3%

-4%

Net Income per diluted share

$ 0.51

$ 0.47

$ 0.51

8%

1%

With a decrease of 5% on the top line I'd expect to see that to extend to the bottom line but in all actuality I see a 1% gain on the bottom line. I'd like to delve through the income statement to see why that may have been the case. Gross margins decreased 7% off the bat because of reduced revenue. General and administrative costs decreased 13% while amortization of purchased intangible assets decreased 20% and restructuring costs decreased 21%. The decrease in these operating expenses didn't help stop the bleeding as operating income decreased 14% overall. After factoring interest income and expenses, investors got a 10% reduction in income before taxes. After factoring in taxes net income decreased 12%. The non-GAAP accounting considerations almost helped neutralize the losses of net income to just a drop of 3%. After taking into account a 4% reduction in shares from last year is how the company realized a 1% gain on earnings per share.

Balance Sheet

Balance Sheet (millions)

3FQ14

2FQ14

Q/Q

Cash and cash equivalents

$ 6,241

$ 5,339

17%

Investments

$ 44,228

$ 41,726

6%

Accounts receivable

$ 4,443

$ 4,378

1%

Inventories

$ 1,528

$ 1,548

-1%

Financing receivables

$ 4,071

$ 4,016

1%

Deferred tax assets

$ 2,504

$ 2,419

4%

Other current assets

$ 1,273

$ 1,263

1%

Total current assets

$ 64,288

$ 60,689

6%

Property and equipment

$ 3,310

$ 3,234

2%

Financing receivables

$ 3,537

$ 3,628

-3%

Goodwill

$ 24,076

$ 24,086

0%

Purchased intangible assets

$ 3,461

$ 3,693

-6%

Other assets

$ 3,184

$ 3,097

3%

Total assets

$ 101,856

$ 98,427

3%

Short-term debt

$ 508

$ 4,762

-89%

Accounts payable

$ 1,051

$ 891

18%

Income taxes payable

$ -

$ -

N/A

Accrued compensation

$ 2,813

$ 2,406

17%

Deferred revenue

$ 9,198

$ 9,350

-2%

Other current liabilities

$ 4,945

$ 5,535

-11%

Total current liabilities

$ 18,515

$ 22,944

-19%

Long-term debt

$ 20,384

$ 12,385

65%

Income taxes payable

$ 1,530

$ 1,483

3%

Deferred revenue

$ 3,953

$ 3,894

2%

Other long-term liabilities

$ 1,678

$ 1,637

3%

Total liabilities

$ 46,060

$ 42,343

9%

Looking at the asset side of the equation on the balance sheet we see an immediate 17% increase from last quarter on the cash and equivalents line item. This one item helped increase total current assets by 6% while increasing overall assets by 3%. The liability side of the equation saw an 89% decrease in short-term debt but and 18% increase to accounts payable, 17% increase to accrued compensation, and 11% reduction in other current liabilities; total current liabilities were decreased by 19% as a result. Long-term debt increased 65% due to the company wanting to buy some of its shares while they're inexpensive. Overall liabilities increased 9% but possibly for a good reason.

Conclusion

The company reported earnings which were 1% higher than a year ago on 5% less revenue while the share price was up 1.11% since the last earnings call. These were mixed results to me and make me want to buy shares of the company sparingly. The company is the fifth largest position in my dividend portfolio. The results were okay to me but we'll have to see what investors seem to think when the market opens tomorrow. The stock is probably up in after hours because the company beat guidance on gross margins and better than expected guidance. That being said, I think the stock is inexpensively valued but I am not going to be chasing if it opens really high. With these results the stock is on my team but on the bench.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long CSCO, SPY. 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.

Source: Cisco Beats Earnings And Guides Higher