Cisco Earnings Beat Estimates as Chambers Waves Goodbye

In its final quarterly earnings release with CEO John Chambers at the helm, Cisco Systems (NASDAQ: CSCO) beat analyst estimates.Cisco-earnings

The technology giant posted adjusted earnings of $0.54 per share last quarter. That figure narrowly topped expectations, which called for $0.53 per share. Revenue increased 5% to $12 billion.

This was an important quarter for Cisco, as it represents the final full quarter with Chambers in charge. On July 26, 17-year Cisco veteran Chuck Robbins – the current senior vice president of worldwide field operations – will assume the chief executive role. Chambers led Cisco through some harrowing times during his two-decade tenure with the company, including the infamous 1999 tech bubble.

More recently, Cisco came under pressure from analysts and investors for its various struggles – the most prominent of which, arguably, was Cisco’s inability to grow revenue in the past few years. This was due primarily to weakness in new markets.

For example, Cisco’s revenue fell 3% in the last fiscal year. The main reason for the decline was that it can’t seem to grow in the emerging markets. Revenue in Cisco’s Asia-Pacific operating region fell 5% in fiscal 2014.

This was a significant failure on Cisco’s part, because the emerging markets represent one of the biggest growth opportunities for large technology companies. Underdeveloped nations are growing at far greater rates than more mature markets like the United States.

Now that Cisco has returned to growth, investors can breathe a little easier. This explains why Cisco shares have rallied over the past several months. In fact, Cisco stock is up 21% in the past year, which is much better performance than the S&P 500, which is up 12% in the same period.

Cisco’s recent strong performance probably led Chambers to believe the company was on more solid footing. Investors appreciate Cisco’s strong rally over the past year, and they likely appreciate another Chambers policy, which was to turn Cisco into a dividend-paying machine.

Cisco only started its dividend program in 2011, and even then, it paid just $0.06 per share. Now, Cisco’s quarterly dividend stands at $0.21 per share – a nearly fourfold increase in just a few years. Cisco’s current dividend yield clocks in at 2.9%, which is among the highest yields in the technology sector.

Cisco’s amazing dividend growth is a direct result of the mountain of cash on its balance sheet. Even though Chambers struggled to grow Cisco’s top line in recent years, the company always generated a lot of free cash – which steadily built up over time.

Indeed, Cisco now holds more than $54 billion in cash, cash equivalents and marketable investments on its balance sheet. This amounts to a whopping 36% of Cisco’s market capitalization. Relatively speaking, Cisco has more cash on its books as a percentage of market value than even Apple (NASDAQ: AAPL).

At the same time, Cisco has just $16 billion in long-term debt, down from more than $20 billion year-over-year. Chambers has done a great job of cutting the company’s debt, as Cisco’s long-term debt-to-equity ratio now sits at a very comfortable 28%.

The key takeaway from the quarterly Cisco earnings report is that shareholders are in good hands. Going forward, Cisco forecasts current-quarter earnings of $0.55-$0.57 per share, which is right in line with analyst expectations. It seems that Chambers has put incoming CEO Robbins in a position to succeed.

Investors have yet to hear more concrete details on the new CEO’s vision for the company’s future, but Cisco still generates healthy free cash flow. It has a manageable level of debt and has rewarded its shareholders with rapid dividend growth. Investors will want to focus in on future earnings reports a little more carefully, just to make sure this doesn’t change.

But for now, Cisco is back on track.

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Published by Wyatt Investment Research at