With today’s 9% intra-day price drop following a disappointing near-term outlook, Cisco (CSCO) shares look more attractive and we would buy/add to positions here, as the long-term fundamental picture remains healthy.
Cisco reported fiscal first-quarter earnings of $0.82/share, up 8% from a year ago and about 3% above the consensus estimate. However, second-quarter guidance of $0.80 to $0.82 is at/below the $0.82 consensus estimate, driving the share price down. Also weighing on the shares is the weaker gross margin, which dipped by 1.3 percentage points, to 64.5%.
Full-year revenue and earnings guidance was unchanged and remains roughly in line with consensus estimates.
Cisco seems to be attracting plenty of new product orders (+33% from a year ago) as demand for its gear is recovering. Also, backlog (which it calls “remaining performance obligations”) and annualized recurring revenue grew faster than total revenue, providing durability to overall growth. However, the company had difficulty procuring enough components to deliver on all of its new orders – essentially, they couldn’t sell what they couldn’t make. We see this as an acceptable reason for the uninspiring revenue growth this quarter (+8%) and the dampened second-quarter revenue outlook.
Weakness in the gross margin was driven by higher component and expedited shipping costs. These elevated costs are now just another part of today’s business climate but we anticipate that they will fade over time and likely be offset by cost controls elsewhere in Cisco’s operations.
Importantly, Cisco said it is “thoughtfully” raising its prices. While this may have pushed up new orders as customers try to buy before the price increase, it should help to offset much of the higher costs over the rest of the fiscal year.
We’ll have more detailed commentary in our regular Wednesday note.
Please feel free to reach me by email if you have questions or comments – I’ll respond as quickly as possible.
- EV/EBITDAX is Enterprise value to Earnings before interest, taxes, depreciation, amortization and exploration spending. Similar to EBITDA, the EBITDAX is a proxy for cash earnings, which also excludes exploration costs that run through the income statement.
- Free cash flow yield is the company’s cash flow from operations less capital spending, divided by its market capitalization. It is a measure of how much free cash flow is at the company’s disposal after it maintains its business, which can then be used to pay down debt, pay recurring or special dividends and/or repurchase shares.