On Wednesday afternoon, Cisco Systems ( CSCO
) released its fiscal third-quarter financial results. I like what I see.
For the three-month period ended April 29, Cisco posted adjusted earnings per share of $1.00 (GAAP EPS: $0.78) on revenue of $14.571B. Adjustments were made for the amortization of acquisition-related intangible assets and for share-based compensation.
The adjusted earnings print and the sales number both beat Wall Street expectations, while that sales number was good for year-over-year growth of 13.5%. Total software revenue was up 18%, while software subscription revenue was up 17%. Total ARR (annualized recurring revenue) was up 6% to $23.8B, while RPO (remaining performance obligation) grew 6% to $32.1B.
Within total sales, product-driven revenue was up 17.4% to $11.092B, while service-driven revenue landed at $3.479B (+2.7%). Cost of sales printed at $5.339B (+13.3%), leaving a gross profit of $9.232B (+13.7%). That was good for a gross margin of 63.4%, up from 63.3% a year ago.
Operating expenses increased 17.2% to $5.286B. This put operating income at $3.946B (+9.3%) and put Cisco's operating margin at 27.1%, down from 28.1% for the year-ago comp. After accounting for interest and taxes, the print for net income grew 5.5% to $3.212B.
-- Americas: Generated sales of $8.634B (+9%), producing a gross margin of 64.2%.
-- EMEA (Europe, Middle East, Africa): Generated sales of $3.806B (+11%), producing a gross margin of 66.6%.
-- APJC (Asia Pacific, Japan, China): Generated sales of $2.131B (+14%), producing a gross margin of 66.4%.
Products and Services
-- Secure, Agile Networks: Generated sales of $7.55B (+29%).
-- Internet for the Future: Generated sales of $1.392B (+5%).
-- Collaboration: Generated sales of $985M (-13%).
-- End to End Security: Generated sales of $958M (+2%).
-- Optimized Application Experiences: Generated sales of $204M (+12%).
For the current quarter, which is Cisco's fiscal fourth, the company sees revenue growth of 14% to 16%. Wall Street consensus is for 14.2%. Cisco also expects to post an adjusted gross margin rate of 64.5% to 65.5% and an adjusted operating margin rate of 34% to 35%.
As far as profitability is concerned, Cisco projects adjusted EPS of $1.05 to $1.07. Wall Street was looking for $1.04, so this is strong current quarter guidance, for both top and bottom-line results.
For the full fiscal year, which the current quarter completes, Cisco sees revenue growth of 10% to 10.5%, which is above the 9.7% expected by Wall Street, and adjusted EPS of $3.80 to $3.82. Consensus expectations were down around $3.76 on that number. Guidance is strong for the full year as well.
So, Why Is the Stock Trading Lower?
During the company's earnings call, CFO Scott Herren revealed that total product orders were down 23%, while this could not hurt results until next fiscal year. CFO Chuck Robbins explained this: "First, our increase in product shipments is often leading customers and partners to absorb these shipments prior to placing new orders. Second, the significant reduction in product lead times reduces the need for extensive advanced ordering by our customers and third, macroeconomic conditions."
Robbins is not as concerned as are those who pressured the stock overnight. Neither am I. Robbins stressed that cancellation rates were lower than normal, and added: "They (customers) continue to invest in key technologies that are core to their overall strategies. As we previously shared, given the unprecedented demand for our technology during the pandemic, we believe sequential order rates are far more informative than year over year rates."
Cash flow from operating activities for the quarter ran to $5.2B (+43%). This brought Cisco's fiscal year-to-date (nine months) operating cash flow to $13.92B. The company has spent just $616M over that time on the acquisition of property and equipment, leaving free cash flow of $13.304B. Out of that, Cisco has bought back $3.029B worth of common stock for the repurchase program and $444M worth of common stock for tax-withholding purposes on vesting restricted stock units. Cisco also paid out $4.713B in dividends to shareholders.
In short, Cisco is a free cash flow beast and that provides the company a bit more optionality than many competitors can enjoy.
Cisco ended the period with a cash position of $23.288B and inventories of $3.474B. This puts current assets at $39.95B. Current liabilities add up to $28.719B. That would place its current ratio at a healthy 1.39 and its quick ratio at an also healthy 1.27.
The fact is that the current liability figure includes deferred revenue of $13.249B or 46% of the whole, and deferred revenue is not a financial liability at all but one of products, labor or services owed, meaning that Cisco's current situation is even stronger than it appears.
Total assets amount to $97.529B. This includes $40.335B of goodwill and other intangibles. At 41% of total assets, this is a bit much for me. Total liabilities less equity comes to $55.234B. This includes long-term debt of $6.663B and short-term debt of $1.731B.
The company could pay all of that debt off out of pocket nearly three times over. Total liabilities also include another $11.011B in deferred revenue. This is a very, very high-quality balance sheet.
Since these earnings were released, I have come across 11 sell-side analysts that are both rated at a minimum of four stars by TipRanks and have opined on CSCO. Among the 11, we have five "buy" or buy-equivalent ratings and six "hold" or hold-equivalent ratings. Two of the "holds" did not set price targets, so we are working with nine targets.
The average price target across the nine is $56.56, with a high of $65 (Sami Badri of Credit Suisse) and a low of $51 twice (Tim Long of Barclays and James Fish of Piper Sandler). Once omitting the high and one of the lows as potential outliers, the average of the remaining seven rises to $56.14.
Interestingly, the five-star rated Ivan Feinseth of Tigress Financial is not part of this mini-survey as Ivan, who long-time readers know I think is exceptional, reiterated his "buy" rating and $73 price target ahead of this earnings release. That's how confident he was. That's how I also see these results.
Performance is good. Guidance is better than good.
The order book can be explained. Backlog has not been impacted through cancellation.
Cisco is a free cash flow beast with a rock solid balance sheet.
Despite all of that, the stock trades at just 12 times forward-looking earnings. Usually, when a stock appears so significantly undervalued, there is a red flag somewhere. I don't see a serious red flag here. On top of all that, CSCO currently yields 3.28%.
I am going to initiate a long position in CSCO Thursday.
CSCO is trading with a $46 handle Thursday morning. The old pivot from the cup-with-handle pattern that provided the breakout of that apex in early April is being retested.
I will initiate here. I will start out with a smallish (1/8) on my intended size, and buy down to the depth of last November's hammer. If I can do that, this will be an investment with a panic point of approximately $39.
My thinking is that a return to the $50+ highs of just five or six weeks ago is quite possible. And I would have no problem going out to July 21 expiration and writing a few $42.50 puts for $0.25 to $0.30 just to shave net basis.
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