Tuesday, May 10, 2011

Cisco Systems Inc. (NASDAQ: CSCO): Q3 Earnings Preview 2011

Cisco Systems Inc. (NASDAQ: CSCO), the world's largest computer networking gear maker, is scheduled to release its fiscal third-quarter earnings after the market close on Wednesday, May 11, 2011. Analysts, on average, expect the company to report earnings of 37 cents a share on revenue of $10.86 billion. In the year ago quarter, the company reported earnings of 42 cents per share on revenue of $10.37 billion. 

Cisco Systems, Inc. designs, manufactures, and sells Internet Protocol (IP)-based networking and other products to the communications and IT industry worldwide. The company is often considered as a technology-industry bellwether as it dominates the market for routers and switches.

In the preceding fiscal second-quarter, the San Jose, California based company's net income was $1.5 billion, or 27 cents per share, compared to a profit of $1.9 billion, or 32 cents per share, in the year-ago quarter. On an adjusted basis, the company earned 37 cents a share in the second quarter. Revenue climbed 6% to $10.41 billion from $9.82 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of 35 cents a share on revenue of $10.23 billion.

At its last earnings call in February, Cisco CEO John Chamber said the company expects third quarter net sales to grow 4% to 6% year-over-year, implying third quarter net sales of $10.78 billion to $10.99 billion. Third quarter non-GAAP earnings per share is expected to range from 35 cent to 38 cents per share while GAAP EPS is expected to range from 8 cents to 10 cents per share. The company expects non-GAAP operating margins to be in the range of 23% to 24% for the quarter. For the fourth quarter ending in July, Cisco expects revenue to grow between 8% and 11%.

Revenue growth for the full year is projected to be in the mid-to low-end of our previously mentioned range of 9% to 12%. For the rest of the fiscal year, the company anticipates non-GAAP total gross margin to be in the range of 62% to 63% with GAAP total gross margin to be approximately 2% lower.

Cisco's global operations and a clientele spanning businesses and government agencies has made it one of the technology sector's bellwethers. The management team's record of controlling costs and growing the business through acquisitions also made them a darling of tech investors over the years. Cisco has also diversified in recent years.

Recently, the company announced a restructuring of its consumer business, including closing down the Flip video camera business. Cisco said that it will exit aspects of its consumer businesses and realign the remaining consumer business to support four of its five key company priorities -- core routing, switching and services; collaboration; architectures; and video. The company said it expects to recognize restructuring charges to its financial results, with an aggregate pre-tax impact not exceeding $300 million during the third and fourth quarters of fiscal 2011. The company also expects a reduction of about 550 employees in the fourth quarter of fiscal 2011.

However, a fragile global economy has proven more damaging than initially expected. Moreover, competition in the company’s core markets has been intensifying for some time. On the bright side, Cisco has been diverting resources to rapidly enter a wide range of adjacent businesses in relatively short order. According to industry experts, Cisco still faces competitive hurdles, as other big tech giants, including one-time partner Hewlett-Packard (NYSE: HPQ), scramble for a larger piece of the corporate IT market, especially with the shift toward cloud computing, which is boosting the demand for data center systems. Cloud computing allows companies to tap computing power through a network instead of in-house data centers. 

During the quarter in review, the company said that it would begin paying a dividend for the first time in its history. The company's board of directors approved a quarterly cash dividend of 6 cents a share. 

Full Disclosure: None.
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