Cisco Systems Inc (NASDAQ: CSCO) Beat Expectations – So Why Are Shares Dropping?

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Cisco Systems Inc (NASDAQ: CSCO) released its quarterly earnings on August 13th for the fourth quarter of its 2014 fiscal year. Overall, the report was positive and the company beat out analysts’ expectations and announced predictions for next year that were in line with estimates from analysts.

The giant tech company posted earnings per share of $0.55 for its fourth quarter, which was higher than its self guided range between $0.51 and $0.53 and the predicted figure from analysts of $0.53.

Cisco also reported revenues of $12.4 billion, which also beat out its own guidance range of $12.04 and $12.29 billion. By the end of the quarter, the company held a book-to-billing ratio of more than 1 and backlog of products that had a total worth of over $5.4 billion.

For the 2014 fiscal year, Cisco released its annual revenues, which reached $47.1 billion, which dropped 3 percent year over year. However, this decrease in revenues did not affect its non-GAAP numbers, which stayed constant from the same quarter one year ago at $10.9 billion. The company was able to keep its non-GAAP earnings because of the measures it had taken to reduce expenses. Cisco’s non-GAAP earnings per share for the year increased to $2.06 by 2 percent from one year ago.

Performance of Product Segments

Cisco has been facing increasing demand from its clients for more software-focused solutions. In order to meet this demand, Cisco continued to shift its focus toward offering software solutions and began delivering application policy infrastructure controller (APIC) during the fourth quarter. The controller gives users a central place to configure, automate, and manage a network based on the needs of applications. So far, the response from customers about the APIC has been positive. One month after the product launch, the company currently serves 60 customers for the software.

One year ago, Credit Suisse (CS) reported that Cisco would fall behind in the competition for Software Defined Networking (SDN) because the product would squeeze the company’s margins. However, the chief financial officer of Cisco, Frank Calderoni, says otherwise. In the earnings report, Calderoni explained that the company’s high tech innovation will enable Cisco to lead the SDN development as well as maximize its gross margins.

Cisco also saw strong growth in revenues from data centers, which grew 30 percent year over year because of a strong user base of Unified Computing System (UCS). The customer based of UCS grew to over 36,500 customers, and repeat sales made up 49 percent of the sales.

The revenues from Cisco’s Service Provider product segment dropped by 11 percent from one year ago. This fall was due to a 13 percent decline in sales of the company’s SP Video. Cisco attributes this drop in sales and revenues to the fact that many of their key clients are undergoing major consolidation and have uncertain futures.

Weak Performance In Emerging Markets

The company has found its weak point in emerging markets for the past few quarters. In the first quarter of 2014, the company’s orders from emerging markets declined 12 percent while service provider orders fell 13 percent. This declining trend will continue as Cisco predicts continuous weak performance in emerging markets. Orders from Latin America fell 6 percent year over year, while orders from Brazil dropped 13 percent.

China, Japan, and the Asia Pacific region experienced a 7 percent decline in product orders, even though product orders from India rose 18 percent. China was hit the hardest, where orders plunged 23 percent. According to Cisco, the decline in orders in the country was due to the strict regulatory environment following the Edward Snowden incident.

Product orders in markets in Asia, excluding China and India, fell 34 percent year over year. Other countries that Cisco saw slow growth rates include Argentina, Thailand, Turkey, and Russia. The company attributes this to the geopolitical and economic volatility in these areas. According to reports from Cisco, the lesser product orders from these emerging markets have knocked off several points from the company’s growth.

For the future, the company stated that it does not expect the product orders in the markets to increase. In fact, the company believes that the product orders from these countries may drop even more.

Restructuring

Cisco’s goal is to manage costs and to continue to concentrate on application-focused products. The company has recently announced a plan to let go of 8,000 employees, which is a cut of 8 percent of its 74,000-worker team. Cisco has already gotten rid of 25,850 positions since February of 2009. The latest round of job cuts will likely cost the company about $700 million before taxes. This will provide the company with more financial freedom to hire new employees who meet the new requirements better.

Q1FY15 Guidance

For the first quarter of the 2015 fiscal year, Cisco forecasts an increase in revenue between 0 and 0.1 percent year over year. It guides non-GAAP earnings per share to be between $0.51 and $0.53, which is in line with the estimates from analysts’ of $0.525. Cisco predicts its gross margins to fall between 61% and 62% for this new quarter.

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