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Cisco Earnings: The Market's Disappointment Creates Opportunity

http://www.fool.com/investing/general/2014/02/12/cisco-earnings-the-markets-disappointment-creates.aspx

Alex Dumortier, CFA
February 12, 2014

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

As the focus shifted back from policymakers to earnings, U.S. stocks were essentially unchanged on Wednesday, with the benchmark S&P 500 index down just 0.03%. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI) fell 0.19%. Tech bellwether and Dow component Cisco Systems (NASDAQ: CSCO) reported its fiscal second quarter results after today's market close and after-hours trading in the stock suggests investors aren't impressed: shares of Cisco were down 4.2% at 5:55 p.m. EST.

First, let's tackle the numbers: Cisco earned $0.47 per share (on an adjusted basis) on $11.2 billion in revenue, which compares favorably with Wall Street's consensus estimates of $0.46 per share and $11.0 billion in revenue. The company also beat with regard to EBITDA(earnings before interest, taxes, depreciation and amortization – a crude measure of cash flow), with $3.71 billion versus $3.65 billion. In short, the headline numbers for the last quarter are not what is causing the stock to sell off.

Moving on to the outlook for the current quarter (at the last earnings report, Cisco's downbeat outlook roiled the market): CEO John Chambers told analysts and investors on the earnings call that he expects fiscal third quarter revenue to experience a 6% and 8% decline year-on-year (for reference, last quarter's revenue fell 7.8% relative to the prior year quarter) -- in line