Thursday, May 15, 2014

Cisco Systems Inc. 3Q14 Earnings; The Future is Looking Bright

Cisco Systems Inc. reported 3Q14 earnings May 14th and held a corresponding conference call after market at 4:30 E.S.T. Quarterly revenue came in at $11.5BB, substantially lower than our estimate of $12.5BB, but beating estimates of $11.35BB, down 7.7% YoY. Quarterly non-GAAP EPS came in at $0.51, which beat our estimate of $0.45 as well as the street’s estimate of $0.48.  Cisco also generated $3.2BB in operating cash flow and returned $3BB in dividends and share buybacks over the quarter.

In 3Q14 Cisco strengthened their gross margin to 62.7% from 61.3% which has been one of their initiatives to improve bottom line.  Although revenue decreased, Cisco saw growth in important business segments including U.S. commercial and U.S. enterprise revenues which both increased 10%, Data Center revenue which grew 29%, and most importantly service revenues which grew 3% with continued strong margins.   A big driver of revenue this quarter as well as into the future is Cisco’s Nexus 9000, a switching platform that enables scalable architecture and is software upgradable on Cisco’s ACI.  Cisco grew from 20 to 175 customers this quarter with potential of over 1,000 while boasting competitive wins at large financial institutions and large cloud providers.  ASR 9000 revenue also grew a massive 59% and represents Cisco’s fastest growing and most successful high-end router.  On the contrary, Cisco has faced challenges in emerging markets, service provider orders, and new product transition in high-end routing and high-end switching.  Cisco has remained confident in their strategy in emerging markets to engage with leadership in these countries on key priorities and technology developments to push their solutions.

Looking forward, Cisco looks to develop and grow two transitions, their global cloud and Internet of Everything, which represent a large portion of my thesis.  Not only are customers already turning to Cisco for their open and highly secure hybrid cloud, but Cisco has announced a partnership with major global InterCloud company Telstra.  Cisco is also making progress identifying IOE to specific business opportunities and pipelines, as customers embrace cloud, mobility, social, and analytics of IOE.  Cisco expects revenue to decline approximately 1-3% and non-GAAP EPS to be around $0.51-0.52 in 4Q14.

Cisco crushed top and bottom line as well as sharply raised guidance for the rest of 2014.  The market finally gave Cisco the credit they deserve as they appreciated 7% after hours following the earnings announcement.  My thesis remains intact and stronger than ever as they have been returning shareholder value through increasing dividends and share buybacks, increasing software and service revenue, as well as made progress towards the $19+ trillion market of Internet of Everything.

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