CSCO Preview: Guidance Is Critical

Cisco Systems (CSCO - commentary - Trade Now) is scheduled to report its first-quarter 2010 results after the close tomorrow with a conference call at 4:30 p.m. EST. Current consensus is for revenue to be $8.74 billion (down 15% year over year but up 2% quarter over quarter) and pro forma EPS of 31 cents.

In the prior quarter, revenue was $8.54 billion (down 18% year over year but up 5% quarter over quarter) and pro forma EPS of 31 cents (GAAP = 19 cents). Product revenue was $6.73 billion (down 22% year over year but up 5% quarter over quarter), and service revenue was $1.81 billion (up 5% year over year and 4% quarter over quarter). The pro forma gross margin was 64.5%, down 50 basis points with last year's fourth quarter and 60 basis points sequentially. The pro forma operating margin at 26.1% was down 340 basis points from last year and 50 basis points sequentially.

Cash from operations was $1.99 billion, with the cash position up about $2.5 billion, to $35.0 billion despite the repurchase of 42 million shares in the period. Accounts receivable increased about $800 million, with days sales outstanding increasing eight days, to 34 days. Inventory increased about $50 million, and days of inventory was unchanged at 40 days.

Overall product orders were up 10%, with a steady improvement in orders during each month. The book-to-bill ratio was characterized as being "comfortably" above parity. Importantly, management commented that this was the first quarter in some time that demonstrated normal seasonal order patterns. Despite the "improvement" from a geographical perspective, orders were down, ranging from 30% in emerging markets to low single-digits in Japan.

Cisco was one of the few companies to actually provide guidance last quarter. It expected revenue to be down 15% to 17% year over year, or in the $8.58 billion to $8.79 billion range, with a pro forma gross margin of about 64%. Operating expenses should be 38% to 39% of revenue, reflecting the company's success at restructuring. Other income should be $25 million with at tax rate of 22%. This should translate into pro forma EPS of 31 cents to 32 cents. At the time of the call, Street consensus was for revenue of $8.59 billion and pro forma EPS of 29 cents.

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At the time of publication, Faulkner had no positions in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.