23 May 2009

CSCO: Financial Analysis through April 2009 (Update)

Cisco Systems, Inc. (NASDAQ: CSCO), the proud plumber of the Internet, has a dominant position in the market for enterprise networking products, such as routers, and related services.  Earlier this year, in an effort to broaden its product line, Cisco announced that it would begin to sell computer servers, equipped with virtualization software, for large data centers.  The company also sells devices intended for home use.

Juniper Systems (NASDAQ: JNPR) is usually considered Cisco's most direct competitor.  However, in the crowded server market, Cisco will face off against with Hewlett-Packard (NYSE: HPQ) and IBM (NYSE: IBM).

We have already posted an analysis of Cisco's financial results, which included earnings of $0.23 per share, for the three months that ended 25 April 2009.  This period was the third quarter of the company's fiscal 2009, which will end in July.

Cisco has now filed a 10-Q quarterly report with a typical set of financial statements and notes.  We reviewed the 10-Q to determine if the analysis needed updating, but filing did not change our results.  The gauge scores are almost exactly as originally calculated:

The 10-Q did not change our evaluation of the April quarter's Income Statement, although we noticed a minor restatement of the year-earlier results that we had previously overlooked. (Click here to see our normalized depiction of Cisco's Income Statements for the last nine quarters.  Please note that our presentation, which we use for all analyses, can and often does differ in material respects from company-used formats.)

The following tidbits of information were gathered from the 10-Q:

Cisco added $4.0 billion of long-term debt in the April quarter.  Half was raised by issuing 10-year notes, and the other half was raised with 30-year securities.  Although $500 million of the $4.0 billion was used to pay the principal on maturing debt, the remaining $3.5 billion went (loosely speaking) into the bank.  Cisco now has over $33 billion in cash and short-term investments.

Given Cisco's history, it is likely that some of Cisco's liquid assets will be used to acquire companies that have technologies coveted by Cisco. The 10-Q makes this plain:

"[W]e will attempt to use the current economic downturn as an opportunity to expand our share of our customers’ information technology spending and to continue moving into product markets similar, related, or adjacent to those in which we currently are active, which we refer to as marketadjacencies."

It would also be reasonable to expect that Cisco will continue to use its cash to repurchase its own shares.  In the April quarter,  Cisco paid $1.2 billion to repurchase 77 million shares at an average price per share of about $15.58.

In the April quarter, Cisco's sales fell by 14 to 22 percent in each of five defined geographic areas.  The decline was steepest in the Emerging Markets and Asia Pacific areas.  Although other U.S.-based multinational companies have stated that a stronger U.S. dollar negatively affected their sales figures, Cisco says that currency fluctuations have not had a material effect because most of the company's sales are denominated in dollars.

Cisco's revenue from the sale of routers fell 32 percent in the April quarter, and switches brought in 20 percent less revenue.  Revenue from products dropped 22 percent, but revenue from services increased 9 percent.

The 10-Q attributed the sales decline to the effect of

"the global macroeconomic downturn across our geographic theaters"

and the consequent

"cautious spending by customers in [all] markets."

We were somewhat surprised that Cisco stated a belief that

"the U.S. economy may be the first major economy to recover."

Full disclosure: Long CSCO at time of writing.

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