Cisco Systems (CSCO) has been delivering better-than-expected earnings and revenues in every quarter for the last two fiscal years. In the first quarter of fiscal 2020 (ending in October), the company beat analysts’ earnings and revenue estimates. Cisco’s revenues of $13.2 billion beat analysts’ estimates of $13.08 billion by nearly 1%. An adjusted EPS of $0.84 also beat analysts’ estimate by about 4% in the first quarter.
Cisco reported its first-quarter earnings results on Wednesday after the closing bell. Investors were disappointed after the company lowered its second-quarter guidance. In the fourth quarter of fiscal 2019, Cisco reported weaker-than-expected guidance for the quarter ending in October.
The stock fell 7.33% on Thursday and closed the trading day at $44.91 due to the weak second-quarter outlook. At Thursday’s closing price, Cisco’s market capitalization was $190.6 billion. The stock is trading 22.9% below its 52-week high of $58.26. Meanwhile, the stock was trading 11.6% above the 52-week low of $40.25. On a year-to-date basis, Cisco stock has only gained 6.57% as of Thursday.
Let’s see how Cisco’s earnings and revenues have been performing on a YoY (year-over-year) basis.
Cisco’s earnings growth trend
On a YoY basis, Cisco’s earnings have been growing for the past ten consecutive quarters. In the first quarter, the company’s adjusted earnings rose 12% YoY and reached $0.84 per share. The adjusted earnings beat the company’s guidance of $0.80–$0.82 per share forecasted during the fourth-quarter results. The earnings growth was driven by top-line and margin growth. The company’s double-digit earnings growth also benefited from its share repurchase activity.
In the first quarter, Cisco’s adjusted gross margin was 65.9%, which was above analysts’ estimate of 64%–65%. The company’s adjusted operating margin of 33.6% also beat the guidance of 32%–33%.
The company expects its adjusted EPS to be $0.75–$0.77 for the second quarter of fiscal 2020. Initially, analysts expected the EPS to be $0.79. Cisco expects its gross margin to reach 64.5%–65.5% and its operating margin to grow 32.5%–33.5% in the second quarter.
Analysts expect the company’s earnings to grow 4.75% in fiscal 2020 and 4.9% in fiscal 2021.
Cisco’s revenue growth trend
Cisco has delivered positive YoY revenue growth for the past eight consecutive quarters. The YoY revenue growth trend followed a decline in YoY revenues for the past eight quarters.
In the first quarter, Cisco reported revenue growth of 0.69% YoY. Excluding the divestiture of the SPVSS (Service Provider Video Software Solutions) business, the revenues grew 2% YoY in the first quarter. Notably, the company divested its SPVSS business in the second quarter of fiscal 2019.
However, the revenue growth rate in the first quarter was much lower than the previous quarter. In the fourth quarter, Cisco reported revenue growth of 4.6% YoY.
What impacted Q1 revenue growth?
During the first-quarter earnings conference call, Cisco’s CEO, Chuck Robbins, said, “We saw things like conversion rates on our pipeline were lower than normal, which says that things didn’t close the way we would have historically seen it. We didn’t see any incremental loss ratios. It was really just stuff slipping. We saw some large deals get done but got done smaller.”
The slowdown in Cisco’s business in the first quarter pointed to weakness in the tech spending scenario. The uncertain macroeconomic environment pressurized the company’s revenues. Trade war fears, Brexit, and Hong Kong issues piled up and impacted the macro environment. Weakness in the service-provider business hurt the revenues in the first quarter. Cisco also underperformed in the emerging markets, which impacted its enterprise and commercial businesses.
Cisco witnessed sluggish revenue growth in the infrastructure platforms segment in the first quarter. The division has remained the most significant contributor to the company’s product revenues. However, the segment’s revenues have been suffering amid the declining demand data center switches and routers business. In the first quarter, the company’s revenues from the infrastructure platforms segment fell 1% YoY. However, the revenues grew 22% YoY and 6% YoY from the company’s security and applications segments, respectively.
Investors are concerned because the company expects its second-quarter revenues to fall 3%–5% YoY. Initially, analysts expected the company’s revenues to grow 2.6% to $12.77 billion for the second quarter. Currently, analysts expect the revenues to fall 3.8% in the second quarter and 1.73% in fiscal 2020. Analysts expect the revenues to return to growth in fiscal 2021 with an increase of 2.89% in fiscal 2021.
Efforts to grow revenues
Amid the weakness, Cisco is diverting its focus from routers and switches to high growth areas like software. In the first quarter, the company’s software unit contributed around 71% of the total revenues. The software subscriptions also improved by 12 points YoY in the quarter. Cisco’s shift towards the cloud computing business will likely drive its revenues.
Acquisitions will likely boost the company’s revenues. In the first quarter, acquisitions added 50 basis points to the company’s revenues. Notably, the company completed many acquisitions in the first quarter, which should drive its revenues in the coming quarters. The Acacia acquisition will likely close in the second half of fiscal 2020.
Although the company is working to boost its revenues, we can’t avoid the macroeconomic factors that are denting its overall business. We think that investors should take a “wait and see” stance about Cisco stock after its first-quarter earnings.