ET" target="_blank" href="http://online.wsj.com/article/SB10001424052748703675904576064321818078598.html" rel="nofollow">home entertainment, tablet computers (the Cius
), video camcorders
, and smart grid
technology. Cisco might be satisfied
if these products merely increases the demand for enterprise network infrastructure.
Additional background information about Cisco and the business environment in which it is currently operating can be found in the look-ahead
Please click here
to see a normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.
Revenue in the January quarter increased 6 percent, from $9.8 billion last year to $10.4 billion in the most recent three months. This growth rate exceeded Cisco's earlier guidance that Revenue would grow between 4 and 5 percent.
The latest Revenue amount surpassed our $10.2 billion estimate by 2.0 percent.
Cisco distinguishes between the Revenue it generates by selling products and by providing services. Product sales were responsible for 79 percent of total revenue in the latest quarter, down from 81 percent in the January 2010 quarter. Product revenue increased 3.3 percent, and service revenue rose 18 percent.
Sales of switches (the company's largest traditional product category) dropped 7 percent to $3.15 billion in the quarter. Sales of New Products -- home video, collaboration, security, etc. -- were $3.2 billion, up 15 percent.
Cisco Systems has four business segments characterized by the "geography" or "theater" they serve: United States and Canada, European Markets, Emerging Markets, and Asia Pacific. The U.S. & Canada segment provided 53 percent of the quarter's total revenue. Note that results for Japan, previously reported separately, have been integrated into the Asia Pacific segment.
Revenue growth was most robust in Europe, 8.9 percent. This seems surprising.
The Cost of Goods Sold
increased to $4.15 billion (39.8 percent of Revenue) from $3.48 billion in the year-earlier quarter. The latest results translate into a GAAP Gross Margin
of 60.2 percent, which is a far less profitable margin than last year's 64.5 percent.
Pricing, product mix, and new product transitions all had negative effects on the Gross Margin.
The non-GAAP Gross Margin was 62.4 percent. Research and Development
We had assumed the GAAP Gross Margin would be 63.0 percent, which turned out to be 280 basis points too optimistic.
spending increased 18.5 percent, from $1.25 billion to $1.48 billion. R&D spending included $132 million in share-based compensation expenses, up from $110 million last year. R&D fell from 12.7 percent of Revenue to 14.2 percent.
The R&D expense was 11.5 percent more than the $1.33 billion we expected.
Sales, General, and Administrative expenses of $2.90 billion were up a substantial 12.4 percent from last year's $2.58 billion. As a percentage of Revenue, SG&A increased from 26.3 percent to 27.8 percent.
Reported SG&A costs were 5.2 percent more than our $2.75 billion estimate.
Other operating expenses (amortization of purchased intangible assets) were $203 million, significantly more than the $125 million we had estimated.
Subtracting the various operating expenses mentioned above from Revenue yields GAAP Operating Income
of $1.68 billion, down 29 percent from $2.37 billion in the year-earlier quarter. The decrease was due to the lower Gross Margin and greater R&D and SG&A expenses.
Operating Income was 24 percent less than our $2.22 billion target, a substantial miss. Although Revenue was a little higher than we expected, operating costs were all greater than we had anticipated.
Non-operating items, such as interest, summed to a net gain of $46 million, compared to a $15 million loss last year. We had expected Interest and Other Income of $60 million.
The effective Income Tax Rate
was only 12 percent. One reason for the unusually low rate was a $65 million tax benefit related to the reinstatement of the U.S. federal R&D tax credit.
We had assumed the tax rate would equal 20 percent.
Bottom-line GAAP Net Income
of $1.52 billion ($0.27/share) was significantly less than last year's $1.85 billion ($0.32 per share). The latest results were 17 percent below of our estimate of $1.825 billion ($0.32 per share).
In summary, Revenue increased 6 percent, better than expected, in the most recent quarter. However, the Gross Margin was light, and other expenses were generally higher than we anticipated. A lower tax rate cushioned the fall, but earnings in the quarter were still less than in the same period of the previous year. The results didn't satisfy our expectations.Full disclosure: Long CSCO at time of writing.