Cisco Earnings Beat: This Is How We Roll

| About: Cisco Systems, (CSCO)
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Networking leader Cisco (NASDAQ:CSCO) reported a record quarter for total revenues ($12.1 billion), operating income ($2.8 billion), net income ($3.1 billion), GAAP earnings per share ($0.59), Non-GAAP earnings per share ($0.51), and cash flow from operations per share ($0.63) for the quarter ending January 2013. CEO John Chambers has led Cisco back from the dismal 2011 financial lows. This was considered a very small beat of $38 million on revenues and a beat of $0.03 on Non-GAAP earnings per share. After reviewing the quarterly report, I consider the results an outlier - encouraging with several qualifications.

Gross profit margin (60.7%) was disappointing, is downtrending, and the second lowest in the past 14 quarters. Operating margin (23.1%) was better, above the recent trend, and the result of cost containment. Net margin (25.9%) was a multi-year, if not all-time, high, but this was due to a one-time settlement and related tax benefit with the IRS. That high of a net margin will not occur again. The net effect was a higher net income than operating income and therefore a higher GAAP EPS than Non-GAAP EPS for this quarter.

I recall a couple of years ago, as Cisco was struggling financially, their problem was called "slow moving sales". Year over year growth of revenues slowed to +4.95%. This was just above expectations of +4.60%. Last quarter was +5.51% and the 4-quarter average is +5.38%. Analysts are projecting a small acceleration for next quarter, April 2013, of +5.45%.

Year over year growth of Non-GAAP earnings per share decreased to +8.51%, a 5-quarter low. This beat expectations of +2.1%. Last quarter was a higher +11.63% and the 4-quarter average is an even higher +12.98%. Analysts are projecting a much slower +2.08% for next quarter April 2013.

Revenues, operating income, and net income reached record highs for the quarter ending January 2013. Both GAAP and Non-GAAP earnings per share did also, but this may be as good as it gets, at least in the short-term, for investors.

Regional revenues tell part of the story. Americas has rebounded in the past year while Europe, Middle East, Africa is still below the year-ago peak. Asia Pacific, China, Japan is languishing and revenues decreased this past quarter. As with many other technology company ecosystems, Asia is where dynamic growth potential exists.

There were no material dollar changes in segment revenues, though vary degrees of growth and contraction year over year. From the prior year, the segment leaders were Data Center +65%, Wireless +24%, and Service Provider Video +20%. Decreases were Other Products -31%, Collaboration -10%, and NGN Routing -6%.

Cisco is liquid with adequate capital and moderate debt. Total assets are $96.4 billion and most likely will reach $100 billion in 2013. The embedded financing operation inflates assets. The trailing annual return on assets is a relatively low +10.1%, compared to other technology giants such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), et al, which exceed +20%.

CEO Chambers has rallied Cisco and effectively managed operating expenses and restructuring. Still it is a hard dollar out there for Cisco, specifically revealed by margins. Non-GAAP gross margin is projected to continue at 60+%, the management outlook is 61% to 62% for the next quarter. The 14-quarter GAAP average is 62% and downtrending. Nothing unusual here, more of the same.

Next quarter April 2013 revenues are projected at +4% to +6% year over year by management. As noted above, the analysts are projecting +5.5%. The 4-quarter average has been +5.4%. Again, nothing unusual here, more of the same.

Non-GAAP earnings per share is projected next quarter April 2013 at $0.48 to $0.50 by management. The analysts are projecting $0.49. The 4-quarter average is now $0.485. Yet again, nothing unusual here, more of the same.

There appears to be no significant near-term upside or downside for Cisco future financial performance. CEO Chambers sees a slow start in 2013 and then steady, slow improvement. I am neutral on CSCO stock though I do project a slow, long-term gain in price with the concomitant phases of highs and lows. Cisco is planning on giving back about half of cash flow to shareholders through dividends and share repurchases.

CEO Chambers has a grander vision, via acquisitions and the cloud, to become more than a networking and communications company. He sees the future of Cisco as a technology company, as an IT company. If he can actualize his vision, there could be a significant long-term (2 to 3 years) upside.

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.