Cisco Gets a Hit on Earnings, Misses on Guidance: What Wall Street's Saying

Cisco beat analysts' expectations with its earnings report on Thursday, but the picture it painted for the months to come wasn't particularly rosy.
By Emily Stewart ,

Cisco Systems (CSCO) - Get Report beat analysts' expectations with its earnings report on Thursday, but the picture it painted for the months to come wasn't particularly rosy.

The San Jose-based networking giant posted fiscal 2016 first-quarter earnings of 59 cents per share on revenue of $12.7 billion, ahead of analysts' consensus estimate of 56 cents per share on revenue of $12.65 billion, according to Thomson Reuters.

"Q1 was a very strong quarter. 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 well as sell more of our portfolio in software and cloud models," said Cisco CEO Chuck Robbins in a statement announcing the results.

Shares were slumping in early Friday trade, down more than 4% to $26.70.

Earnings-per-share jumped 9.3% from the same period the year before, and revenue climbed 4%, with improvements in the Americas, Europe, the Middle East and Africa and Asia Pacific, Japan and China. Non-GAAP operating income climbed 8% year-over-year to $3.9 billion.

In a press release, Cisco also touted its capital allocation program, including $1.1 billion paid in dividends and the repurchase of 45 million of its shares during the first quarter. It also gave nod to its acquisitions of OpenDNS, MaintenanceNet and Pawaa during the period as well.

Looking forward, however, Cisco's immediate future might not be so bright.

The company slashed its second quarter guidance to 0% to 2% growth, with earnings per share at between 53 cents and 55 cents.

"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. 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," said Robbins in a statement.

He also addressed the issue in a call with analysts reported by Fortune. "Yes, the guidance is lower than the market was expecting," he said. "I don't take that lightly."

Here's what analysts are saying following the results and earnings call:

Deutsche Bank analyst Vijay Bhagavath (Buy, PT $35)

"A better than feared print: Q1: $12.68B / 59c versus consensus: $12.65B / 56c, with strength driven by Datacenter Switching, UCS Servers, and Meraki Cloud Services. The Q2 revenue guide for 0-2% Y/Y growth (normalized for Video CPE exit) and EPS guide for 53-55c came in weak versus consensus view for ~5% Y/Y growth and 56c EPS. We note weak Enterprise order trends (consistent with our channel checks) and Book/Bill < 1.0x. Our Buy rating reflects CSCO transitioning increasingly to a Software and Recurring Services model (Security and Meraki being a case in point) - which is core basis for an improving FY17+ earnings outlook. Our $35 PT is unchanged on our updated FY16/17 estimates."

Jeffries analyst George Notter (Hold, PT $29.50)

"Cisco printed solid October results but guided down for January. It's not a major surprise they're getting hit with the FX/Macro headwinds right now. It's logical to expect that the FX/macro headwinds will persist, especially if U.S. interest rates increase with a December Fed tightening. We continue to rate the shares a Hold."

BMO Capital Markets analyst Tim Long (Outperform, PT $33)

"Mixed. There were many positives in the quarter, including very strong margins, uptake of new products, impressive growth in subscription-based product deferred, switching, data center, and a rebound in emerging markets. However, guidance was light on macro concerns and the impact of a strong U.S. dollar, and our estimates are moving lower. While the lower guidance raises some concerns, we still believe Cisco is a well-positioned company, and expect recent partnerships, new products, and Cisco's strategic initiatives to develop greater revenue predictability and sustain margins over the long term. We are lowering our price target to $33 from $34, which represents 14x our FY17 EPS estimate of $2.38. We continue to rate CSCO shares as Outperform."

Pacific Crest Securities analyst Brent Bracelin (Overweight, PT $36)

"Cisco posted another solid quarter with $0.03 of EPS upside on efficiency gains and a mix shift to software, which helped margin expand to 30.5%, the highest in nine years. A slowdown in Asia and Canada tempered the growth outlook to 0% to 2% for the January quarter. A shift to a software model positions Cisco to expand margin and grow profits faster than revenue. Maintain Overweight."

Drexel Hamilton analyst Brian White (Buy, PT $34)

"Last night, Cisco reported a strong 1Q:FY16 with big margin upside but provided a conservative 2Q:FY16 outlook on macro softness. We are tweaking our EPS estimates and lowering our 12-month price target to $34.00 from $35.00. Despite a soft outlook, Cisco's stock remains inexpensive at less than 9x (ex-cash, taking into consideration the after-market sell-off in the shares) our CY:16 EPS projection with a 3.2% dividend yield. Given continued strong execution, expected product ramp in H2 and an attractive valuation, we recommend buying into Cisco weakness."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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