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Cisco Exits Fiscal 2014 On A Happy Note, Eyes Cost Cuts

August 15, 2014 | About:

Networking giant Cisco Systems (NASDAQ:CSCO) reported better-than-expected fourth-quarter results on August 13, outdoing the Street’s expectations and own guidance as well. Let’s have a deeper look into the quarter’s results and find out about the company’s future roadmap.

Revenue decline moderates

Cisco’s fourth-quarter revenue of $12.4 billion was roughly flat compared with the year-ago quarter. Solid geographical contributions (except from emerging economies) and improved sales of some product lines helped the company to avoid year over year revenue decline against expectations. The company had predicted its revenue to decline in the range of 1%-3%.

On the product front, almost all the product lines generated weak revenues that were compensated by strong deployment of its data center solutions. Data center business grew significantly by 30% year over year. The company posted 5% growth in its services revenue driven by large deal wins.

Geographically, revenue from the Americas grew 2% with most of the strength coming from the U.S. Within the U.S., revenues from commercial and enterprise businesses shot up by 17% and 16%. Revenues from these two businesses recorded growths of 7% and 8%, respectively, in Europe, the Middle East and Africa, driven by strength across European countries.

Though public sector business did well in the U.S., its global performance remained flat.

The company noticed product orders growing at a faster rate for its advanced threat solutions, including Advanced Malware Protection Everywhere, Sourceware, ThreatGRID.

Emerging markets & service provider end-market continue to be a challenge

As expected, contributions from emerging economies were soft. Revenues from Latin America dropped 6%, with Brazil declining 13%. In Asia, weak revenues from Japan and China were offset by 18% growth in India. But the rest of the emerging Asian countries posted a decline of 34%. Persisting economical and geopolitical issues in certain countries have arrested business prospects that are hurting Cisco’s revenues over the past few quarters.

The networking giant also faced lower demand from the service provider end market. Service provider revenue dropped 11%, mainly on account of weak order growth for video content solutions and broad-based weakness in the emerging markets.

Without any potential catalysts likely to occur in the near term, Cisco expects contribution from the emerging markets to worsen for the coming many quarters.

Expenses under control

Adjusted operating expenses dropped 1% from the year-ago quarter to $4.2 billion. The operating expenses as a percentage of revenue were also lower, reflecting the company’s continuous cost-reduction efforts.

Management looks contented with its ongoing cost-saving program and has stated that over the past three years, expenses have been almost flat, despite revenue improvements. This has generated favorable operating leverage driving the company’s adjusted profitability.

Notably, on a reported basis, operating expenses grew 4.2% to roughly $5 billion on the back of higher investments in new product development and acquisitions.

Earnings improve

Adjusted earnings per share (EPS) grew 5.8% year over year to $0.55, surpassing Street’s expectation of $0.53. Despite flat revenue, the EPS improvement was largely driven by improved operating performances, lower tax rate and share outstanding.

Tax rate in the quarter was 19.1%, down from 20.9% in the comparable period last year. The company has been a committed buyer of its common shares, which is a great support to the EPS and the investors as well.

Expectations going forward

Considering successful product transition and rise in demand from the developed markets, Cisco expects first quarter revenue to range from flat to 1% rise. The upbeat guidance also takes into consideration prospective large deals in the pipeline, growing demand for its x86 server blade and a solid product backlog.

The company has entered into a go-to-market program with Microsoft (NASDAQ:MSFT) to boost sales of its data center and cloud solutions.

Cisco has also decided to reduce its workforce by 6,000. This will enable the company to fight the challenges from weak emerging market and service provider market. Though certain restructuring charges will dilute reported EPS, the company expects adjusted EPS in the range of $0.51-$0.53, roughly flat from the same period last year. The company also expects to invest most of its cost savings in its key growth areas.

Putting the pieces together

Cisco’s weak performance in the emerging markets can be a serious drag on its results in the coming quarters. But the company is trying hard to keep its profitability up by cutting costs. Also, its growing exposure to the data center space and synergies from the recent acquisitions could strengthen Cisco’s competitive position going forward.

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