Cisco Systems (CSCO, Financial) delivered an impressive Q1 earnings report Thursday, offering up growth across the board thanks to several high-value acquisitions and a solid climb in sales.
The tech giant started its new fiscal year with a bang, posting a net income of $2.4 billion, or 48 cents per share. Non-GAAP earnings came in at 59 cents per share on $12.68 billion in revenue, skating past Wall Street expectations of 56 cents per share.
Cisco’s 4% climb in revenue was led by major growth in the company’s data center, wireless and security businesses. The figures were slightly dampened by a weak performance from Cisco’s second-largest business –Â routing –Â where sales dropped 8% year over year. Yet a strong Q1 gross margin was held up by continued efficiency improvements being implemented across the board. Operating expenses dropped 1% to $4.1 billion on a non-GAAP basis, despite a jump in head count thanks to new acquisitions.
Operating income rose by a cool 8% to $3.9 billion in the first quarter with a non-GAAP margin at 30.5%. Net income posted an identical 8% rise, hitting $3 billion. Cash flow from operating activities shot up by 11% year over year, settling at $2.8 billion.
“Q1 was a very strong quarter,” CEO Chuck Robbins explained in a statement. “We are accelerating our ability to deliver on growth opportunities, aggressively driving our Cloud business and delivering continued strength in our deferred product revenue, as we sell more of our portfolio in software and Cloud models.”
Cisco’s cracking start to FY 2016 follows a campaign of bold acquisitions by Robbins and his new C-level team. From the company’s $635 million deal with OpenDNS to its $452 million acquisition of Lancope, Robbins has spent his first few months in office building upon Cisco’s infamously aggressive reputation as an M&A giant. Last month, the firm reported three new acquisitions in just three days. It goes without saying that not a lot of companies could get away with that.
Unfortunately, a good-sized chunk of the company’s more lucrative acquisitions are now based overseas. Former CEO John Chambers, who still plays an active role in the company, was a notoriously outspoken critic of American tax policy. Consequently, he decided to try and "stick it to the man" by taking on major investments across Europe – dropping $3.3 billion on Norwegian video communications firm Tandberg in 2010 and another $5 billion for U.K. firm NDS in 2012. From Austria and Israel to Denmark and China, Chambers snapped up startups in just about every country where he could find them.
Why is that a problem for the company now? Thanks to unfavorable exhange rates, Robbins admitted this week that growth would be sluggish over the current quarter. Forecasts are already being cut, and shares immediately slid by over 6% last night following the news.
“We guided to solid growth in Q2. Our guidance reflects lower-than-expected order growth in Q1, driven largely by the uncertainty of the macro environment and currency impacts,” he said. “Despite these headwinds, I believe we are executing very well. We are moving very fast to capture new opportunities, and I feel good about how we are positioned for the second half of the year.”
At this point, it appears unlikely Cisco will be able to rely on its Q1 momentum to push it through the first half of FY 2016. These unfavorable exchange rates are set to wreak havoc on quite a few multinationals in the year to come – with Disney (DIS, Financial) alone expecting to lose some $500 million in operating income thanks to poor risk management. There aren't a lot of indicators yet as to how hard Cisco will be hit; however, it seems fair to say the company's overseas acquisitions are now proving more of a hindrance than a help.
With any luck, that hindrance will only be temporary, and Cisco’s domestic acquisitions will be able to pick up some of the slack over Q2. Either way, the company's upcoming half-year results won’t be terribly pretty – but with the stellar year Cisco posted in 2015, even an ugly quarter won't look too bad stacked against the results of other big legacy companies. Cisco is undeniably still on its way up; however, this impending stumble will definitely knock Robbins and his team back a peg or two.
