Cisco Fiscal Third Quarter Earnings Results

As stated when I started this blog about a month and half ago, it is not my intention to discuss financial results directly related Cisco Systems, Inc. However, since Cisco is a key player in the Telecommunications and Data Networking industry, I can’t let this news go by easy.

First, Q3 marked the one year anniversary of the acquisition of Scientific Atlanta. Going forward Cisco will provide guidance and comparison simply to year over year combined numbers. The company achieved record revenue of approximately $8.9B, a 21% year over year increase, slightly above guidance of 19-20% provided in the Q2 conference call. Cisco standalone revenue increase was approximately 17% year over year. This continues to be one of the fastest standalone year over year revenue growth rate the company has seen in several years. Order growth continued to be very solid with product book to bill of greater than 1. Non-GAAP net income was $2.1B, an increase year over year of approximately 16%. Non-GAAP earnings per share were a record $0.34 and GAAP earnings per share were $0.30, which were increases of 17% and 36% respectively year over year. Cash generated from operations was $2.4B, and Cisco repurchased $1.5B of common stock. Cash, cash equivalents, and investments were at $22.3B at the end of the quarter.

John Chamber’s comments:“Q3 was a very strong quarter. Our vision of how the industry was going to evolve appears to be playing out very much as we expected. We believe our differentiated strategy is also achieving the benefits to both Cisco and our customers that we thought were possible. We have a high degree of confidence in our strategy and business momentum. In addition, I would not underestimate the potential that collaboration enabled by Web 2.0 technologies could have on Cisco’s and the entire IT / Communications industry’s growth over the next five to ten years. I believe the next wave driving growth of both the Internet and IT sales will be built around collaboration and Web 2.0 capabilities. “

“We believe that Cisco is uniquely positioned. We are not aware of any other company in the IT and communication industry that is even close to these types of growth numbers and market share gains across such a broad array of products. From our customer segments to geographic theaters and product and technology markets, we are focusing on approximately 20 areas. It is extremely unusual to overachieve on almost all of our focus areas as we did in Q1 and Q2. Even in very strong quarters, such as this one, we would expect at least 1-2 of our focus areas to be in the low to mid single digit range or even negative.”

Some comments from equity analysts:

SCOTT MORITZ - THE STREET
Shares sank 6% early Wednesday despite a strong earnings report and enthusiastic talk from CEO John Chambers. In a conference call after the close Tuesday with analysts and investors, Chambers said the company's gains at the expense of smaller rivals allowed it to boost fourth-quarter revenue guidance. Cisco now expects year-over-year revenue growth of "15% to 16%" for the quarter, Chambers said, "above the high end of the guidance we have given." But that wasn't enough for some observers. Asked when the company would feel confident enough about the outlook to raise guidance to the 15% to 20% annual growth range, Chambers declined to fuel a more bullish case. "Growth in the midteens is good for a company of this size," Chambers said. "I'm going to resist the nudges at this point."

MERRILL
First, operating margins declined again this quarter, suggesting no material margin upside exists. Second, the strong trends are already reflected in the expectations. The EPS beat was a function of buybacks and not from positive business surprises. Third, Cisco beat revenues by ~$116mn, yet Scientific Atlanta grew $113mn sequentially. While this is not an apples to apples comparison, it is difficult to quantify how much of the trend is related to an abnormal and temporary boost in demand for set-top boxes and how much of it represents sustainable upside. How many large cap tech stocks grow 16% per annum and maintain high profitability? Very few. We are convinced that in the long run, Cisco will continue to generate value for shareholders. However, in the near term, we expect the stock to remain range bound, as in our view, Cisco is at the peak of its current cycle with risk of some momentum moderation post-4Q. Secondly, similar to this quarter, we believe it will be difficult to generate earnings surprises as the Street’s expectations already reflect the current business momentum.