Cisco Systems, Inc. (NASDAQ:CSCO), the worldwide leader in networking that transforms how people connect, communicate and collaborate, today reported second quarter results for the period ended January 23, 2016. Cisco reported second quarter revenue of $11.9 billion, net income on a generally accepted accounting principles (GAAP) basis of $3.1 billion or $0.62 per share, and non-GAAP net income of $2.9 billion or $0.57 per share. Second quarter revenue was $11.8 billion excluding $93 millionof revenue from the Customer Premises Equipment portion of the Service Provider Video Connected Devices business (SP Video CPE Business) that was divested during the second quarter on November 20, 2015.
“We delivered a strong Q2, and are managing the business extremely well in a challenging macro environment,” saidChuck Robbins, Cisco chief executive officer. “We’re managing the company on two fronts. We’re focused on continued strong execution in the near term while investing in the innovation to lead our customers into the future.”
A reconciliation between net income and EPS on a GAAP and non-GAAP basis is provided in the table following the Consolidated Statements of Operations. Supplementary information related to other GAAP and non-GAAP measures is also provided in the tables below.
Cisco Increases Quarterly Cash Dividend; Stock Repurchase Program Authorization Increased
Cisco has also declared a quarterly dividend of $0.26 per common share, a 24% or five-cent increase over the previous quarter’s dividend, to be paid on April 27, 2016 to all shareholders of record as of the close of business on April 6, 2016. Future dividends will be subject to Board approval.
Cisco’s board of directors has also approved a $15 billion increase to the authorization of the stock repurchase program.Cisco’s board had previously authorized up to $97 billion in stock repurchases. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases under this program, including the additional authorization, is approximately $16.9 billion.
“We had another strong quarter, delivering both the top line and bottom line growth,” said Kelly Kramer, Cisco executive vice president and chief financial officer. “I’m happy with the progress we are making as we continue to shift our business model to more software, and recurring revenue. We are very confident in the strength of our business and future cash flows allowing the substantial increase of our dividend this quarter to $0.26. We remain committed to our shareholders in delivering profitable growth and returning a minimum of 50 percent of our free cash flow back annually.”
Financial Highlights for Q2 FY16
(All comparative percentages are on a year-over-year basis unless otherwise noted)
All revenue, non-GAAP, and geographic financial information in this “Financial Highlights for Q2 FY16” section are presented excluding the SP Video CPE Business for all periods as it was divested during the second quarter onNovember 20, 2015.
Revenue — Revenue was $11.8 billion, up 2% with product revenue up 2%. Service revenue growth was 3%. Revenue by geographic segment was: Americas and EMEA each up 1%, and APJC up 11%. Product revenue growth was led by Security which increased 11%, and NGN Routing and Collaboration which increased 5% and 3%, respectively. Wireless was flat while Switching and Data Center declined 4% and 3%, respectively.
Gross Margin — On a GAAP basis, total gross margin and product gross margin were at 62.3% and 61.3%, respectively. Non-GAAP total gross margin and product gross margin were 64.2% and 63.3%, respectively. This increase in the non-GAAP product gross margin as compared with 62.5% in the second quarter of fiscal 2015 was driven by continued productivity improvements, partially offset by pricing and to a lesser extent product mix. GAAP service margin was 65.5% and non-GAAP service gross margin was 66.7%. Total gross margins by geographic segment were: 64.3% for theAmericas, 65.4% for EMEA, and 61.8% for APJC.
Operating Expenses — On a GAAP basis, operating expenses were $4.1 billion, down 7%. Non-GAAP operating expenses were $3.9 billion, down 1%, and at 33.0% of revenue. Headcount compared with the end of the first quarter of fiscal 2016 decreased by 406 to 71,657, which included the impact from the divestiture of the SP Video CPE Business and our workforce realignment, partially offset by additional headcount from acquisitions and investments in key growth areas such as security, cloud and software.
Operating Income — GAAP operating income was $3.3 billion, up 26%, with GAAP operating margin of 27.6%. Non-GAAP operating income was $3.7 billion, up 10%, with non-GAAP operating margin at 31.2%.
Provision for Income Taxes — The GAAP tax provision rate was 4.8%. Tax benefits of $519 million related to prior-year periods were included in the GAAP tax provision rate but were excluded in the non-GAAP tax provision rate. The non-GAAP tax provision rate was 20.9%, reflecting the reinstatement of the U.S. federal R&D tax credit.
Net Income and EPS — On a GAAP basis, net income was $3.1 billion and EPS was $0.62. On a non-GAAP basis, net income was $2.9 billion, an increase of 8%, and EPS was $0.57, an increase of 8%.
Cash Flow from Operating Activities — was $3.9 billion an increase of 36% compared with $2.9 billion for the second quarter of fiscal 2015.
Cash and Cash Equivalents and Investments — were $60.4 billion at the end of the second quarter of fiscal 2016, compared with $59.1 billion at the end of the first quarter of fiscal 2016, and compared with $60.4 billion at the end of fiscal 2015. The total cash and cash equivalents and investments available in the United States at the end of the second quarter of fiscal 2016 were $3.9 billion.
Deferred Revenue — was $15.2 billion, up 8% in total, with deferred product revenue up 11%, driven largely by subscription based and software offerings, and deferred service revenue up 7%. Cisco continued to build a greater mix of recurring revenue as reflected in deferred revenue.
Days Sales Outstanding in Accounts Receivable (DSO) — was 33 days at the end of the second quarter of fiscal 2016, compared with 34 days at the end of the first quarter of fiscal 2016.
Other Financial Highlights
In the second quarter of fiscal 2016, Cisco declared and paid a cash dividend of $0.21 per common share, or $1.1 billion. For the second quarter of fiscal 2016, Cisco repurchased approximately 48 million shares of common stock under its stock repurchase program at an average price of $26.12 per share for an aggregate purchase price of $1.3 billion.
As of January 23, 2016, Cisco had repurchased and retired 4.5 billion shares of Cisco common stock at an average price of $20.97 per share for an aggregate purchase price of approximately $95.1 billion since the inception of the stock repurchase program.
During the second quarter of fiscal 2016, Cisco completed the acquisitions of Portcullis, ParStream, Lancope and 1 Mainstream in the security, data analytics and video markets. These moves are consistent with Cisco’s strategy to increase innovation and R&D investment in growth areas. Cisco recently completed the acquisition of Acano to help accelerate Cisco’s collaboration strategy to deliver video more broadly. In addition, on February 3, 2016, Ciscoannounced its intent to acquire Jasper Technologies, a company that provides a cloud-based Internet of Things (IoT) software-as-a-service platform, which is expected to close in the third quarter of fiscal year 2016.
Business Outlook for the Third Quarter of Fiscal Year 2016
On November 20, 2015, during the second quarter of fiscal 2016, Cisco completed its divestiture of the SP Video CPE Business. In order to provide a clear view of Cisco’s continuing expected financial performance, the revenue guidance for the third quarter of fiscal 2016 is normalized to exclude the SP Video CPE Business for the third quarter of fiscal 2015. The corresponding revenue in the third quarter of fiscal 2015 for the SP Video CPE Business was $519 million. (Original Source)
Shares of Cisco are up nearly 4% in after-hours trading. CSCO has a 1-year high of $30.31 and a 1-year low of $22.47. The stock’s 50-day moving average is $24.67 and its 200-day moving average is $26.38.
On the ratings front, Cisco has been the subject of a number of recent research reports. In a report released today, UBS analyst Amitabh Passi maintained a Buy rating on CSCO, with a price target of $31, which represents a potential upside of 34.0% from where the stock is currently trading. Separately, on February 8, Goldman Sachs’ Simona Jankowski maintained a Buy rating on the stock and has a price target of $32.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Amitabh Passi and Simona Jankowski have a total average return of 7.5% and 9.8% respectively. Passi has a success rate of 56.9% and is ranked #424 out of 3560 analysts, while Jankowski has a success rate of 56.2% and is ranked #222.
The street is mostly Bullish on CSCO stock. Out of 20 analysts who cover the stock, 14 suggest a Buy rating , 5 suggest a Hold and one recommends to Sell the stock. The 12-month average price target assigned to the stock is $29.36, which implies an upside of 26.9% from current levels.