Cisco (CSCO) Down 0.4% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Cisco Systems (CSCO). Shares have lost about 0.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cisco due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Cisco Q3 Earnings and Revenues Top Estimates

Cisco Systems reported third-quarter fiscal 2020 non-GAAP earnings of 79 cents per share that beat the Zacks Consensus Estimate by 9.7% and improved 1% year over year.

However, revenues declined 8% year over year to $11.98 billion but surpassed the consensus mark by 0.9%. The decline can be attributed to coronavirus crisis-induced supply chain and component constraints and associated manufacturing challenges.

Quarter in Detail

Region-wise, the Americas, the EMEA and the APJC revenues decreased 8%, 7% and 9% year over year, to $7.12 billion, $3.14 billion and $1.73 billion, respectively.

Service revenues (28.3% of total revenues) increased 5% to $3.39 billion, driven by growth in software and solution services. Software subscriptions represent 34% of Cisco’s software revenues, up 9% year over year.

Product revenues (71.7% of total revenues) declined 12% on a year-over-year basis to $8.6 billion.

Total product orders were down 5% on a year-over-year basis. In terms of customer segments, product orders for public sector was up 1%. Commercial, enterprise and service provider revenues were down 11%, 4% and 3%, respectively.

Region-wise, EMEA and APJC product orders decreased 4% and 22%, respectively, while product ordersacross the Americas were flat on a year-over-year basis. Product orders across total emerging markets declined 21% and the BRICs plus Mexico fell 29%.

Breakup of Product Revenues

Infrastructure Platforms comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues fell 15% year over year to $6.43 billion. The segment was severely impacted by coronavirus crisis-induced supply chain constraints.

Routing declined due to weakness in service provider and enterprise end markets. Switching declined in both campus and data center end markets. However, Cisco witnessed strong demand for Catalyst 9000 family of switches.

Additionally, wireless revenues declined overall despite strong growth in Meraki and strength across WiFi 6 products. Data Center revenues decreased owing to weak demand for servers, and HyperFlex solutions.

Applications consist of the Collaboration portfolio of Unified Communications (UC), Conferencing and TelePresence, IoT, and application software businesses such as AppDynamics and Jasper.Revenues decreased 5% year over year to $1.36 billion due to a decline in Unified Communications and TP end points, partially offset by double-digit growth at AppDynamics and IoT software.

Notably, solid uptakeof Webexvideo conferencing and business productivity offerings amid the COVID-19 induced work-from-home demand environment lessened the decline.Management stated that 95% of the Fortune 500 is now utilizing Cisco’s collaboration solutions.

Security revenues improved 6% to $776 million. The upside can be attributed to solid demand witnessed by identity and access, advanced threat, and unified threat management solutions, amid high growth in Internet traffic.

Cisco witnessed strong demand for cloud-based solutions, including Duo and Umbrella. The company’s differentiated end-to-end approach across the network, cloud and endpoints has helped it expand the clientele. The company introduced SecureX, comprehensive cloud-based security platform, to strengthen enterprise security infrastructure with unified visibility, automation and security capabilities across network endpoints, applications, and the cloud.

Other Products contains service provider video, cloud and system management, and various emerging technology offerings. Revenues slumped 27% to $28 million.

Operating Details

Non-GAAP gross margin expanded 200 basis points(bps) from the year-ago quarter to 66.6%. On a non-GAAP basis, product gross margin expanded 210 bps to 65.8% due to favorable mixand memory cost savings, partially negated by pricing impacts, while service gross margin expanded 160 bps to 68.9%.

Non-GAAP operating expenses were $3.81 billion, down 9% year over year. As a percentage of revenues, operating expenses contracted60 bps to 31.8%.

Non-GAAP operating margin expanded 270 bps year over year to 34.9%.



Balance Sheet and Cash Flow

As of Apr 25, 2020, Cisco’s cash & cash equivalents and investments balance were $28.57 billion, compared with $27.06 billion as of Jan 25, 2020.

Total debt (short-term plus long-term), as of Apr 25, was $16.08 billion compared with $15.99 billion, as of Jan 25.

Operating cash flow was $4.2 billion compared with $3.8 billion reported in the prior quarter.

Remaining performance obligations (RPO) at the end of the reported quarter were $25.5 billion, up 11%. The metric represents total committed non-cancelable future revenues.

In the fiscal third quarter, Cisco returned $2.5 billion to shareholders through share buybacks worth $1 billion and dividends worth $1.5 billion. The company has $10.8 billion remaining under its current share buyback program, with no termination date.

Q4 Guidance

For fourth-quarter fiscal 2020, revenues are expected to decline 8.5-11.5% on a year-over-year basis.

Non-GAAP gross margin is expected in the range of 64-65%, while operating margin is anticipated between 31.5% and 32.5% for the quarter.

Non-GAAP earnings are anticipated between 72 cents and 74 cents per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 8.58% due to these changes.

VGM Scores

At this time, Cisco has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Cisco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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