Friday, November 14, 2014

Cisco Reports 1Q15 Earnings/ Sell Thesis

On November 12, 2014 Cisco Systems Inc. reported 1Q15 earnings after market close at 4:05PM.  Cisco beat analyst estimates by $80MM with revenue of $12.24BB.  Cisco did not meet my expectations of $12.47BB.  Cisco also reporting non-GAAP diluted earnings of $0.54 per share, beating analyst estimates by a penny, but missing my optimistic estimates of $0.63.  Cisco returned close to $2BB to shareholders through dividends and share repurchases.  Cisco also announced their CFO Frank Calderoni would step down at the end of the year.

During the first quarter of shipments, Cisco more than doubled its paying customer’s adoption of their new ACI controller that enables automation and programmability of the network.  The Nexus 9000 and the ACI have seen extremely strong demand.  Product orders in EMEA was a big revenue driver this quarter.  EMEA product orders had growth of 6%; U.K. product orders were up 20%, Germany’s were up 6%, and South Europe’s were up 20%.  Excluding service provider growth, growth in the U.S. was 12% and U.S. federal grew 34%.  U.S. service provider however declined 18% which Cisco previously warned could be an issue.  Cisco also faced pressure in Asia-Pacific, Japan, and China which declined 12% and China which was down 33%.  Routing also hurt Cisco as sales were down 4% as a result of lower CapEx spending by major service providers and challenges in EM.  Switching sales were up 3% which represents the first quarter in the last three that Cisco had growth in that segment.

Cisco has also taken numerous steps to differentiate themselves in the highly competitive cloud computing space.  They have taken their ideas of “Internet of Everything” and interconnectivity and created a cloud structure that can unify private, public, and hybrid clouds.  Different from big competitors like Google, Rackspace, and Amazon, Cisco allows its customers to seamlessly move their work between clouds.  This will also allow Cisco to package their software as part of the cloud solution which was one of my main theses.  As a result of Cisco taking the initiative to offer solutions (hardware packaged with software), services revenue grew 5% this quarter.  Services now represents over 23% of Cisco’s revenue.

Following Cisco’s great quarter we have decided to take our money and run.  Cisco provided disappointing guidance and cited issues that I foresaw and believe will stagnate their growth.  Cisco expects $0.50-0.52 EPS and revenue growth of 4-7% which are below consensus as well as my estimates.  They also face severe headwinds in their service provider segment and in emerging markets.  Cisco has fulfilled all my theses which include making numerous acquisitions, returning tremendous value to shareholders, offering software and hardware packaged as solutions, and cutting operating expenses.  Although Cisco has been good to us returning 20% on two occasions, and a generous dividend, I don’t see much potential for future growth so we will exit our full position.

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