Networking giant Cisco (NASDAQ:CSCO) managed to do slightly better than the dire guidance it had previously issued when the company reported its second-quarter earnings. Cisco's quarter was weak, with revenue falling by 7.8% year over year, but there was good news buried in the sea of bad news. As I pointed out in my Cisco earnings preview, two areas to watch were sales in emerging markets and sales to service providers, and the former improved significantly compared to the first quarter. Here are the key takeaways from Cisco's earnings report:
The results at a glance
The non-GAAP numbers tell the story. Revenue for the quarter fell 7.8% year-over-year to $11.2 billion, slightly better than the 8%-10% decline previously guided. Net income fell by 7.4% to $2.5 billion, with EPS falling 7.8% to $0.47. Cisco spent $4 billion on share buybacks during the quarter, returning a total of $4.9 billion to shareholders through buybacks and dividends. Along with the earnings report, Cisco announced a 12% increase in its quarterly dividend to $0.19 per share.
The good and the bad
Last quarter, the big story was that emerging market sales had collapsed. This quarter, the situation improved significantly. While emerging market orders fell by 12% year-over-year in the first quarter, this number improved to just a 3% decline in the second quarter. The U.S. enterprise and commercial segments were strong, with orders increasing by 13% and 10% respectively, and cost cutting led to operating expenses declining compared to the same period last year. The headcount was reduced by about 1,000, or 1.4%, since the first quarter, and this helped rein in costs.
Revenue from the data center segment and the security segment grew in the double digits, partially making up for the steep declines in Cisco's core switching and routing segments. Orders from service providers fell by 12% in the quarter, partly related to product transitions brought on by Cisco's recently launched Insieme line of products. Cisco guided for a revenue decline of between 6%-8% for the third quarter, so the company seems to expect this service provider weakness to continue.
Product orders in total fell by 4% year-over-year, with service providers accounting for most of this decline. Orders from public sector customers grew by 1%, as did orders from commercial customers, while orders from enterprise customers declined by 2%. Orders from the Americas and the Asia-Pacific region each fell by 5%, so it's clear that the biggest problem facing Cisco now is not international markets, but service providers.
A resurgent competitor
Juniper Networks (NYSE:JNPR), one of Cisco biggest competitors, has been growing its share of the router market as Cisco struggles to return to growth. Juniper beat analyst estimates when it reported earnings in January, and its router revenue surged by 17% year over year. This is the opposite of the steep declines the company saw in its router business back in 2012, and Juniper has now grown its router business for five straight quarters. It's hard to tell how much Cisco's current issues with service providers has to do with this growth, but I suspect that as Cisco recovers from its current problems, Juniper will have a tougher time winning market share. Cisco is still dominant in its core markets, and that won't change any time soon.
A solid dividend hike
I suggested in my earnings preview that Cisco might raise its dividend, and the company did exactly that, raising the quarterly dividend from $0.17 per share to $0.19 per share. After the post-earnings decline, shares of Cisco now yield around 3.4%, and the company is on track to spend about $4 billion over the next year on dividends. That's only about 35% of the free cash flow in fiscal 2013, although this payout ratio will likely be higher in 2014 due to the current issues faced by the company.
The bottom line
Cisco's quarter was not good by any means, but the emerging market problems of the first quarter seem to have been partially resolved. What's left are weak orders from service providers, and this looks like a short-term problem. While next quarter will probably be weak as well, with the company guiding for continued revenue declines, Cisco has been through transitions like this before. The market loves to punish Cisco for short-term disappointments while ignoring the big picture, but times of bad news and pessimism are often the best times to buy. Cisco's problems are temporary, and while they shouldn't be ignored by investors, they don't change the long-term story.
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Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.