Why Is Cisco (CSCO) Down 29.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Cisco Systems (NASDAQ:CSCO). Shares have lost about 29.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cisco due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Cisco Beat Q2 Earnings Estimates, Near Term Outlook Grim

Cisco Systems reported second-quarter fiscal 2020 non-GAAP earnings of 77 cents per share that beat the Zacks Consensus Estimate by 1.3% and grew 5.5% year over year.

However, revenues declined 3.5% year over year to $12 billion but surpassed the consensus mark by 0.2%.

The company blamed lower customer spending due to several reasons, including macro-economic weakness, for sluggish results and third-quarter outlook.

Top-Line Details

Product revenues (72.2% of total revenues) declined 6.5% on a year-over-year basis to $8.67 billion.

Service revenues (27.8% of total revenues) increased 5.1% to $3.33 billion, driven by growth in software and solution services. Software subscriptions represent 72% of Cisco’s software revenues.

Region-wise, the Americas, the EMEA and the APJC revenues decreased 4.6%, 2.8% and 0.7% year over year, respectively. Total emerging markets declined 7% and the BRICs plus Mexico fell 20%.

In terms of customer segments, public sector revenues were flat. Commercial, enterprise and service provider revenues were down 4%, 7% and 11%, respectively.

Total product orders were down 6% on a year-over-year basis.

Segment Details

Infrastructure Platforms (54.4% of total revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues fell 8% year over year to $6.53 billion.

Routing declined due to weakness in service provider. Switching declined in both campus and data center end markets. However, Cisco witnessed strong demand for Catalyst 9000 family of switches and Nexus 9K solutions.

Additionally, wireless revenues declined overall despite strong growth in Meraki. Data Center revenues decreased due to weakness in servers, partially offset by strong growth in HyperFlex.

Applications (11.2% of total revenues) consist of the Collaboration portfolio of Unified Communications (UC), Conferencing and TelePresence, IoT, and application software businesses such as AppDynamics and Jasper.

Revenues decreased 8% year over year to almost $1.35 billion due to a decline in UC, partially negated by double-digit growth at AppDynamics.

Security revenues (6.2% of revenues) improved 9% to $748 million. The growth can be attributed to solid demand witnessed by identity and access, advanced threat, and unified threat management solutions.

Cisco witnessed strong demand for cloud-based solutions, including Duo and Umbrella. The company’s differentiated end-to-end approach across the network, cloud and endpoints has helped it expand the clientele. Management stated that 100% of the Fortune 100 are now using one or more of Cisco’s security solutions.

Other Products segment contains service provider video, cloud and system management, and various emerging technology offerings. Revenues surged 110% to $46 million.

Partnership & Product Details

Cisco’s integration with Microsoft’s Azure Virtual WAN and Office 365, and a deeper partnership with Amazon (NASDAQ:AMZN) cloud arm Amazon Web Services have prepared it to deliver highly secure end-to-end connectivity and better application performance. This is likely to help Cisco sell more of its SD-WAN solutions as customers move more applications to the cloud.

Moreover, during the quarter, the company introduced Cisco Silicon One and the Cisco 8000 carrier-class router family built on Silicon One. It also unveiled the iOS XR7 operating system.

Further, Cisco expanded the security portfolio from the cloud to the edge. The company’s integrated IoT architecture, which comprises new software-based security solutions Cyber Vision and Edge Intelligence data collection tool, provides enhanced visibility, insights and threat detection across customers’ entire environment.

Operating Details

Non-GAAP gross margin expanded 230 bps from the year-ago quarter to 666.4%. On a non-GAAP basis, product gross margin expanded 310 bps but service gross margin was unchanged year over year.

Non-GAAP operating expenses were $3.93 billion, down 1.1% year over year. As a percentage of revenues, operating expenses increased 80 bps to 32.7%.

Non-GAAP operating margin expanded 150 bps year over year to 33.7%.

Balance Sheet and Cash Flow

As of Jan 25, 2020, Cisco’s cash & cash equivalents and investments balance were $27.06 billion, down from $28 billion as of Oct 27, 2019.

Total debt, as of Jan 25, was $15.99 billion compared with $18.50 billion, as of Oct 27.

Operating cash flow was $3.8 billion, flat year over year

Remaining performance obligations (RPO) at the end of the reported quarter were $24.9 billion, up 11%. The metric represents total committed non-cancelable future revenues.

In the fiscal second quarter, Cisco returned $2.4 billion to shareholders through share buybacks and dividends. The company has $11.8 billion remaining under its current share buyback program.

Moreover, Cisco announced a penny increase in the dividend to 36 cents per share.

Acquisitions

In early third quarter, Cisco completed its acquisition of Exablaze, a designer and manufacturer of advanced network devices, to reduce latency and improve network performance.

Q3 Guidance

For third-quarter fiscal 2020, revenues are expected to decline 1.5-3.5% on a year-over-year basis.

Non-GAAP gross margin is expected in the range of 64.5-65.5%, while operating margin is anticipated between 32.5% and 33.5% for the quarter.

Non-GAAP earnings are anticipated between 79 cents and 81 cents per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Cisco has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Cisco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.