Good Quarter, Bad Guidance From CSCO

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Cisco Systems (CSCO - commentary - Cramer's Take) reported its first-quarter results tonight with in-line revenue and pro forma EPS above expectations. More important, guidance for the second quarter was very negative.

Revenue in the quarter revenue was $10.33 billion (up 8% year over year; flat quarter over quarter), with pro forma EPS of 42 cents (GAAP = 37 cents). Product revenue was $8.64 billion, up 8% year over year and flat from the fourth quarter, with service revenue at $1.70 billion, up 10% from last year but down 2% sequentially.

The pro forma gross margin was 65.6%, essentially flat with last year's first quarter and up 60 basis points sequentially. The pro forma operating margin at 27.9% was down 110 basis points from last year and 160 basis points sequentially.

Cash from operations was $2.7 billion, pushing the cash position up about $200 million after the repurchase of 46 million shares of stock. Accounts receivable declined about $550 million, sending days sales outstanding down four days, to 29 days. Inventory also declined about $25 million, but days of inventory increased one day, to 37 days.

From a product perspective, revenue from Routers increased 1% from last year, and Switches were up 8% over the same time frame. As usual, Advanced Technologies were the strong point, with total revenue up 15% year over year, led by Unified Communications (up 22%), Wireless (up 21%) and Security (up 19%). The Emerging Technologies (i.e., the second generation Advanced Technologies) experienced revenue growth of 25%, led by Applications Network Services (up 25%) and Video (up 21%). Despite the solid revenue growth, overall product orders were weak, with a book-to-bill below one.

Management noted that the quarter started out as expected, with August orders up 7% year over year but deteriorated from that point. October orders declined 9% from last year. Overall product orders for the quarter actually declined 3% year over year. From a regional perspective, orders in the U.S. were down 8% year over year, with particular weakness from enterprise customers. Europe declined mid single digits, with service provider orders down in the midteens. Asia/Pacific orders were down about 4% from last year, with particular weakness in India. Emerging market orders were "slightly" negative as well. The only positive was Japan, which experienced order growth of 20% driven by service provider demand.

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At the time of publication, Faulkner had no positions in the stocks mentioned, but The Telecom Connection Model Portfolio was long Cisco Systems.

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.

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