Cisco (CSCO) reported last night. Cisco sold-off last night. My knee-jerk reaction? They didn't get me this time. As a trader/ investor who has always had a high opinion of CEO Chuck Robbins and was always willing to give a reasonably valued tech stock like Cisco that pays a nice dividend a fair chance... "they" had gotten me a few times in the past.
This time it may be different. We have heard that many times before. This time, the firm actually took guidance down a peg or two. Maybe this time... is "the" time. Let's check these numbers out.
For the period ending April 30th, which happens to be Cisco's fiscal third quarter, the firm posted adjusted EPS of $0.87 (GAAP: $0.73) on revenue of $12.84B. The top line number fell short of Wall Street's expectations, and was barely good enough for any year over year growth (+0.3%) at all. The adjusted bottom line result represented 5% annual growth and did beat Wall Street by a penny.
The firm points out very early in the press release that progress has been made on it's business model transformation with total Annualized Recurring Revenue (ARR) running at $22.4B, up 11% from the comparable quarter last year.
The CEO
Chuck Robbins, chair and CEO of Cisco, reassured investors with commentary made in that release... "We continued to see solid demand for our technologies and our business transformation is progressing well. While Covid lockdowns in China and the war in Ukraine impacted our revenue in the quarter, the fundamental drivers across our business are strong and we remain confident in the long term."
How Significant Were Those Impacts?
Cisco announced in March that the firm would halt business operations in both Russia and Belarus. Total negative revenue impact from this disruption came to an estimated $200M. Historically, Russia, Belarus, and Ukraine combined contribute about 1% to Cisco's total revenue. This impact is greater than that to account for costs associated with ending the business there. These numbers are in the press release.
During the conference call, Robbins mentioned that the firm suffered an estimated $300M negative revenue impact completely attributed to the firm's inability to get power supplies out of China during lockdowns. That's an aggregate negative impact of $500M. Exactly how much the firm's actual revenue number fell short of consensus for the quarter.
Business Line Performance
The firm reports results for two business lines... Products and Services. The Products line is then further broken down into five units.
Secure Agile Networks: sales increased 4% to $5.869B.
Internet for the Future: sales increased 6% to $1.324B.
Collaboration: sales decreased 7% to $1.132B.
End to End Security: sales increased 7% to $938M.
Optimized Application Experiences: sales increased 8% to $183M.
Products (totaled): sales increased 3% to $9.448B.
Services: sales decreased 8% to $3.387B.
Almost a Bright Spot
While revenues in aggregate disappointed, to be fair.. both adjusted EPS and revenue printed in line with what Cisco has produced for each of the prior four quarters. It's just that more was expected. There was however, a bright spot, or almost a bright spot...and that spot was margin.
Adjusted total gross margin came to 65.3%, which was down from 66% one year ago, but well above consensus view for little more than 64%. Adjusted product gross margin printed at 64.1%, while adjusted Services gross margin landed at 68.9%. This leads to adjusted operating margin of 34.7%, which was also well above the prevailing consensus view.
Guidance
Here's where it gets ugly.
For the current quarter: Cisco sees revenue contracting anywhere from -1% to -5.5%, and adjusted EPS printing at $0.76 to $0.84. Wall Street had been at $0.92.
For the full year (three quarters in): Cisco sees revenue growing 2% to 3%, resulting in Adjusted EPS of $3.29 to $3.37. Wall Street was looking for $3.44.
Balance Sheet
As of April 30th, Cisco has a net cash position of $20,108B and inventories worth $2.231B on the books. This brought current assets down to $35.981B. Current liabilities add up to $24.15B, leaving the firm with a current ratio of 1.49 (healthy), and a quick ratio of 1.39 (also healthy).
Total assets amount to $92.797B, but that does include $38.452B in "goodwill" and another $2.811 worth of "purchased intangible assets." Hmm. I get the concept of what intangible assets are. Adding the word "purchased" implies that you paid something for it, but it's not really quantifiable. Super. Anyway, that's $41.263B worth of assets that can not be counted or seen on the balance sheet, or 44.5% of all assets. Again.. super.
Total liabilities less equity add up to $52.397B, including $8.418B in long-term debt. (The firm also has $1B in short-term debt that counts towards the current and quick ratios.) I have no real problem with Cisco's balance sheet. It passes the Sarge test. The firm can pay off their debt-load out of pocket if they had to. That's a lot of "goodwill" but that does not negatively impact my overall perception of Cisco's books.
My Thoughts
The firm has warned you that its problems... issues with the supply chain in China and the war in Ukraine are not easily rectifiable. They have guided the current quarter and the full year (really two quarters) below consensus. There is no reason to rush your decision on this. CSCO is not really a trader, but it could be an investment for a revenue seeking individual.
Cisco pays shareholders $1.52 per year per share. This morning, that's a yield of about 3.6%. The firm is also buying back shares as well. Cisco repurchased $252M worth of shares during the quarter reported. The firm has $17.6B left on its current authorization, and will now have a cheaper stock to buy.
The model I use for these articles for some reason only has the 38.2%and 61.8% Fibonacci retracement levels on its model. (50% is not really a Fib level) Therefore, I placed the 23.6% and 78.6% retracement levels on this chart for you. Readers will find that CSCO has found at least temporary support above the stock's 78.6% Fib retracement of the entire November 2020 through December 2021 rally.
My opinion would be that someone already long this stock, who has already taken this hit, does not need to liquidate unless that spot, which is $39.20 should fail. In fact, should CSCO approach that price, I think I may dip my toes into the sea. If interested, the June 10th $39 puts are paying about $0.60 this morning.
