Cisco Tries to Find Earnings Redemption (CSCO)

John Chambers needed some redemption for Cisco Systems, Inc. (NASDAQ: CSCO) today.  The company reported quarterly earnings of $0.37 EPS on $10.41 billion in revenues, while Thomson Reuters had estimates of $0.35 EPS and $10.24 billion in revenues.  The good news is that the numbers came in above expectations.  The bad news is that the bar was set low.

The net earnings after items was $0.27 EPS, but $0.37 is the number on a non-GAAP basis that analysts will use.  Product sales were $8.24 billion and $2.17 billion came from services.

The company saw inventory turn of 10.6 times in the second quarter and its Days sales outstanding was 40 days.  For the ending cash balance (plus short-term securities), Cisco ended with $40.2 billion versus $39.9 billion at the end of fiscal 2010 and compared with $38.9 billion at the end of the first quarter of fiscal 2011.

Cash flows from operations were $2.6 billion for the second quarter of fiscal 2011, compared with $2.5 billion for the second quarter of fiscal 2010, and compared with $1.7 billion for the first quarter of fiscal 2011.

Cisco repurchased 89 million shares of common stock under the stock repurchase program at an average price of $20.15 per share for an aggregate purchase price of $1.8 billion.  As of January 29, 2011, The company has repurchased and retired 3.3 billion shares at an average price of $20.81 per share for a total of $69.3 billion.  It currently has some $12.7 billion left for buybacks.

Gross margin was still very high but a disappointing 62.4% rather than 64% expected.  If competition is going to remain tight, margin compression is likely to continue.

Cisco says that it is “going through a period of transition as we move aggressively in the market with our architectural strategy” as it integrated multiple products through an architectural approach.  We are disappointed about one thing.  There is no mention of the word DIVIDEND in its press release.  Maybe that will come later today.  Without formal guidance, consider this unfinished business.

Shares closed up 0.23% at $22.04 and shares were trading around $21.80 in the after-hours reaction.  The 52-week range is $19.00 to $27.74 and the shares fell last quarter to $20.52 from $24.49 before ultimately challenging $19.00.

UPDATE 5:05 PM EST: Cisco’s did offer revenue guidance for growth of 4% to 6% in its third quarter and 8% to 11% for its fourth quarter.  The translation for the quarter ahead is $10.78 to $10.99 billion in revenue, and Thomson Reuters has estimates of $10.85 billion.  That just isn’t enough today. Cisco’s CFO said that the company is still targeting 1% to 2% for a dividend payout this year but was not specific about when it would occur.  One of the issues around the dividend revolves around the tax-efficient repatriation of cash held in foreign entities.  Unfortunately, investors are growing tired of the foot-dragging.  Shares had been down about 1% in the after-hours, but now shares are down over 8% and challenging the $20.00 handle in the after-hours.

JON C. OGG