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Cisco Systems, Inc. (CSCO) Q2 Earnings Preview: Marginable Improvement

 February 13, 2013 10:06 AM

(By Rich Bieglmeier) Cisco Systems, Inc. (CSCO) will host a conference call today, at 1:30 PM (PT) to announce its second quarter fiscal year 2013 financial results for the period ending Saturday, January 26, 2013. Wall Street anticipates that CSCO will earn $0.48 for the quarter. iStock expects the Networking & Communication Devices company to report earnings that will beat Wall Street's consensus number. The iEstimate is $0.49, a $0.01 upside surprise.

Cisco designs, manufactures and sells Internet protocol (IP) based networking and other products related to the communications and information technology industries worldwide.

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While the global macro-global economic environment has been difficult for the Dow and NASDAQ 100 member, especially Europe and China, management has been able to deliver at least 16 straight bullish earnings surprises.

On average, profits per share have topped the Street's consensus view by 9.33% with a range of 2.44% to 16.67%. Price performance in the day's surrounding earnings has been symmetrical for the past 16 checkups, eight rallies and eight corrections. Unfortunately, the degree of change has slanted in a bearish direction with an average loss of 8.34%, and a range of -0.30% to -17.80%, of which, three of the eight gave up more than 12%.

On the bullish eight, Wall Street rewarded investors with an average increase of 6.28% with a max of 12.60% (the only plus 10% move) and a min of 0.60%.

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For the three months ended October 27, 2012, CSCO's sales increased 5.5% year-over-year. Meanwhile, the networker's gross margin percentage remained relatively flat, dipping slightly to 61% from 61.2%.  Management says, "Total gross margin decreased by 0.2 percentage points, primarily as a result of higher sales discounts and unfavorable product pricing as well as unfavorable product mix shifts related primarily to the growth of certain product areas."

When we read the above, iStock wants to look at inventory immediately. Is old, outdated tech gathering dust, which means more discounts are needed to move product out the door? Nah, it doesn't seem to be the issue as inventory increased at a slower pace – 2.7% - than revenue's 5.5%, but remained constant at a little more than 14% of revenue.

Meanwhile, accounts receivables fell 9.7% as days outstanding actually dropped by four days, from 34 to 30. Net financing receivables slightly increased to $ 3.726 billion from $3.661 billion - 1.7% - and less than revenue growth.  Overall, the combo of modest favorable changes in receivables should mean higher, not lower margins in upcoming quarters.  

We also noticed that the pace of shareholder purchases slowed dramatically, which means any EPS benefit could be immaterial for Wednesday's announcement if the pace remains constant from Q1 to Q2.

Overall, iStock thinks Europe and the impact of the Fiscal Cliff will garner the most focus from Wall Street for Cisco Systems, Inc. (CSCO) earnings announcement. In Q1, the America's contributed 5% revenue growth while Europe contracted 2%. Since, most of Europe has slid back into recession, and Q4's GDP contracted in the US; however, business spending was up a touch.

The America's are the most important because they account for 66.3% of CSCO's sales, with Europe a distant 2nd at 19.7% and falling. If the US held firm and Europe didn't slide off the map, then iStock sees CSCO meeting or beating the $0.49 iEstimate on mildly improved margins.


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