Cisco (CSCO) Up 0.1% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Cisco Systems (CSCO). Shares have added about 0.1% in that time frame, underperforming the S&P 500.

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

Cisco Q4 Earnings and Revenues Top Estimates

Cisco Systems reported fourth-quarter fiscal 2021 non-GAAP earnings of 84 cents per share, which beat the Zacks Consensus Estimate by 1.2%. The bottom line increased 5% year over year. Non-GAAP earnings were anticipated between 81 cents and 83 cents per share.

Revenues rose 8% year over year to $13.1 billion and surpassed the consensus mark by 0.7%. The top line was driven by strength across customer markets and revenue growth in all geographies. For fiscal fourth quarter, revenues were anticipated in the range of 6-8% on a year-over-year basis.

Quarter in Detail

Region-wise, the Americas and the APJC revenues increased 8% and 13% year over year to $7.731 billion and $2.098 billion, respectively. EMEA revenues rose 6% to $3.297 billion. Americas, EMEA and APJC contributed 58.9%, 25.1% and 16%, respectively, to total revenues.

Service revenues (26% of total revenues) increased 3% year over year to $3.41 billion, driven by growth in maintenance business, software and solution support services.

Software revenues were up 6% to $4 billion. Software subscription revenues increased 9%. Subscriptions contributed 81% to Cisco’s software revenues.

Product revenues (74% of total revenues) increased 10% on a year-over-year basis to $9.716 billion. The upside can be attributed to broad-based strength across Infrastructure Platforms and Security businesses and the buyout of Acacia Communications.

Total product orders improved 31% on a year-over-year basis. In terms of customer segments, product orders from public sector, commercial and service provider were up 22%, 41% and 40%, respectively. Enterprise orders were up 25% on a year-over-year basis.

Region-wise, Americas, EMEA and APJC product orders increased 34%, 24% and 29%, respectively, on a year-over-year basis. Product orders across total emerging markets were up 25%, while the BRICs plus Mexico rallied 37%.

Breakup of Product Revenues

Infrastructure Platforms (77.7% of Product revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues increased 13% year over year to $7.546 billion driven by double digit growth in all business with the exception of data center. Data Center revenues declined due to weak demand environment for server products.

Switching revenues improved in the quarter under review due to solid uptick in campus switching especially Catalyst 9000 family of switches and Meraki solutions. In wireless vertical, the company gained from ramping up Wi-Fi 6 products and solid growth in Meraki wireless solutions. Routing revenues increased backed by strength across enterprise and service provider vertical as well as healthy adoption of Cisco 8000 platform.
 
Applications (13.8% of Product revenues) includes the Collaboration portfolio of Unified Communications (UC), Conferencing and TelePresence (or TP), IoT and application software businesses such as AppDynamics and Jasper. Revenues dropped 1% on a year-over-year basis to $1.344 billion, owing to weakness in collaboration portfolio. IoT software, AppDynamics, cloud contact center and cloud calling platforms witnessed “solid growth” in fiscal fourth quarter, noted Cisco.

For Webex, recurring subscription revenue was up 9% year over year. Robust adoption of Webex video conferencing and business productivity offerings amid the pandemic induced work-from-home and adoption of hybrid work model bodes well for the segment.

Security (8.5% of Product revenues) revenues inched up 1% to $823 million driven by growth in cloud-based security and Zero Trust solutions as well as strong momentum for Duo and Umbrella solutions. The company’s differentiated end-to-end approach across the network, cloud and endpoints helped it expand clientele. The company is witnessing momentum in identity and access, advanced threat as well as unified threat management solutions. Recurring subscription revenues from Security business witnessed an increase of 13% year over year in fiscal fourth quarter.

Other Products contains service provider video, cloud and system management as well as various emerging technology offerings. Revenues slumped 42% to $4 million.

Acquisitions in Q4

Cisco acquired event management platform — Socio Labs — for an undisclosed amount. U.S-based Socio Labs’ event technology platform assists organizers to conduct virtual, in-person as well as hybrid events with varying size of attendees and in different formats.

In June 2021, Cisco completed the buyout of Kenna Security, a privately held company specializing in risk-based vulnerability management.

Cisco also concluded the buyouts of Slido s.r.o., Sedonasys Systems Ltd and Involvio LLC in the quarter under review.

Operating Details

Non-GAAP gross margin expanded 60 basis points (bps) from the year-ago quarter’s level to 65.6%.

On a non-GAAP basis, product gross margin expanded 180 bps to 65%. Service gross margin shrank 240 bps to 67.4%.

Non-GAAP operating expenses were $4.2 billion, up 8% year over year. As a percentage of revenues, operating expenses expanded 10 bps to 32.1%.

Non-GAAP operating margin expanded 50 bps year over year to 33.5%.

Balance Sheet and Cash Flow

As of Jul 31, 2021, Cisco’s cash & cash equivalents and investments balance were $24.5 billion compared with $23.6 billion as of May 1, 2021.

Total debt (short-term plus long-term), as of Jul 31, was $11.526 billion compared with $11.532 billion as of May 1.

Cash flow from operating activities was $4.5 billion compared with $3.9 billion reported in the prior quarter.

Cisco returned $2.4 billion to shareholders, which includes dividend payments of $1.6 billion and share repurchases worth $791 million. The company has $7.9 billion shares left under its current share buyback program with no termination date.

Remaining performance obligations (RPO) at the end of fiscal fourth quarter were $30.9 billion, up 9%. The metric represents total committed non-cancelable future revenues. Product RPO increased 18% while Service RPO was up 3%.

Deferred revenues at the end of the fiscal fourth quarter were $22.2 billion, which increased 8% year over year.

Fiscal 2021 Performance

For fiscal 2021, the company reported non-GAAP earnings of $3.22 per share, unchanged from fiscal 2020 levels. Revenues rose 1% year over year to $49.8 billion.

Cash flow from operating activities was $15.5 billion unchanged from fiscal 2020.

Cisco returned $9.1 billion to shareholders, which includes dividend payments of $6.2 billion and share repurchases worth $2.9 billion.

Guidance

For first-quarter fiscal 2022, revenues are expected to indicate growth in the range of 7.5-9.5% on a year-over-year basis.

Non-GAAP earnings are anticipated between 79 cents and 81 cents per share.

Non-GAAP operating margin is anticipated between 31.5% and 32.5% for the quarter.

The company cautioned that the ongoing component shortages and resultant supply chain issues will continue in the first half of fiscal 2022 and might carry on in the remaining half of the fiscal.   Due to higher supply chain costs, the company expects to report non-GAAP gross margin in the range of 63.5-64.5% for the first quarter of fiscal 2022. It had reported non-GAAP gross margin of 65.8% in first-quarter fiscal 2021.

For fiscal 2022, revenues are expected to rise 5-7% on a year-over-year basis. Non-GAAP earnings are anticipated between $3.38 and $3.45 per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, Cisco has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

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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