Cisco - Solid First Quarter Earnings Release Beats On Lowered Expectations

| About: Cisco Systems, (CSCO)
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Shares of Cisco (CSCO) rose more than 7% in after hours trading on Tuesday. The worldwide leader in networks and networking methods reported its first quarter results for its fiscal 2013.

First Quarter Results

Cisco reported first quarter revenues of $11.88 billion, up 5.5% on the year before. Revenues beat analysts consensus of $11.80 billion.

The company reported a net income of $2.09 billion, up 17.7% on the year. Diluted earnings per share rose a similar 18.2% to $0.39.

Non-GAAP earnings rose 10.6% to $2.57 billion, with non-GAAP diluted earnings per share coming in at $0.48 per share. Earnings beat the analysts consensus of $0.46 per diluted share on a non-GAAP basis.

During the quarter, Cisco repurchased 15 million shares for an average price of $16.44 per share, for a total consideration of $253 million. The company has $5.6 billion remaining under its current stock buyback authorization.

CEO and Chairman John Chambers commented on the results, "We delivered record results this quarter - with revenue growth of 6 percent and strong earnings per share growth - demonstrating our vision and strategy are working. Our innovation engine, operational discipline and on-going evolution are enabling us to differentiate in the market."

Segment Information

Revenues in the North American division rose a solid 6.6% to $7.02 billion. Revenues in Europe, Middle-East and Africa reported came in at $2.84 billion, unchanged from last year. Unfavorable exchange rates had a negative impact on reported revenues. Asia Pacific revenues were up 10.4% to $2.01 billion.

Margins were strong as well, with gross margins up 30 basis points on the year to 62.7%. Margins rose 80 basis points on the quarter, despite discounts offered to customers.

Product revenues rose 3.9% to $9.30 billion, while service revenues rose 12.0% to $2.54 billion.

The acquisition of NDS boosted service provider video revenues of 30% to $1.15 billion. Data center revenues were up 61% to $417 million, while wireless revenues rose 38% to $486 million. The collaboration division saw some weakness, with revenues down 8% to $1.02 billion.


For the current second quarter of its fiscal 2013, Cisco guides for non-GAAP earnings per share of $0.47-$0.48, in line with analysts expectations. Revenues are expected to rise between 3.5 and 5.5%, implying second quarter revenues of $11.9-$12.2 billion. Analysts expected Cisco to guide for second quarter revenues of $12.02 billion.


Cisco ended its first quarter with $45.0 billion in cash, equivalents and short term investments. The company operates with $16.3 billion in short and long term debt, for a net cash position of roughly $28.7 billion.

During its fiscal year of 2012, Cisco generated annual revenues of $46.1 billion. The company net earned $8.0 billion, or $1.49 per diluted share.

Factoring in a 7% jump in after hours trading, the market values Cisco at roughly $95.5 billion. This values operating assets at $66.8 billion. Based on 2012s annual results, this values the firm at 1.4 times annual revenues and 8-9 times annual earnings.

Cisco recently raised its quarterly dividend by 75% to $0.14 per diluted share, for an annual dividend yield of 3.3%.

Investment Thesis

Year to date, shares of Cisco are trading roughly unchanged. Shares rose from $18 in January to highs of $21 in March. Shares hit lows of $15 when the company completed the $5 billion acquisition of NDS. Shares rose back on a strong outlook to $19 and are currently exchanging hands at $18 per share.

Shares of Cisco have given up roughly half their value from $33 per share in 2007. Compared to its peak of $80 per share back in 2000, shares are still down some 80%. Between its fiscal 2009 and 2012, Cisco boosted annual revenues from $36.1 billion to $46.1 billion in 2012. Net income rose from $6.1 billion to $8.0 billion. Earnings per share growth exceeded net income growth, as Cisco retired almost 10% of its shares outstanding over the past four years.

Cisco beat on both revenues and earnings, although expectations were reasonably low. The company cut selling prices which drove up demand and boosted revenues. Profit margins actually increased on strict cost control, after Cisco cut 7,800 jobs in the past year. Still there are warning signs including a 10% fall in orders in the Europe, Middle East & Africa region. Furthermore, public business is under pressure in all continents.

Shares of Cisco seem fairly valued, especially when excluding the generous cash position. Still investors have some concerns. Some investors worry that the company might squander some if its huge cash balances, pointing towards the "expensive" $5 billion acquisition of NDS. Furthermore, Cisco faces stiff competition from other powerhouses including Hewlett-Packard (HPQ), among others. Newer start-ups, including Palo Alto Networks (PANW) is becoming a worthy competitor for security services.

Despite concerns about competition, slower economic growth, and misuse of the large cash balances, I think the valuation is appealing. Shares are valued at merely 8 times annual earnings, if one excludes the net cash position of over $5 per share. Furthermore, the dividend yield is very attractive, given the strong cash flow generation.

Cisco is a perfect addition to any long term diversified portfolio.

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.