Cisco Systems’ (CSCO) first quarter 2010 earnings beat the Zacks consensus by 13 cents. Revenue beat by 3.1%. Both revenue and EPS were significantly better than the guided range.

Revenue of $9.02 billion was up 5.7% sequentially and down 12.7% year over year. Revenue was at the high-end of management’s guidance range of a year-over-year decline of 15-17%.

Products generated 80% of revenue, increasing 7.0% sequentially and declining 16.6% year over year. Order rates also strengthened, particularly in the U.S. , indicating continued revenue growth in the next quarter. Management stated that the company saw bottom in the fiscal fourth quarter, with improvement in the first. Results are likely to trend upward going forward.

Around 55% of total revenue was generated in the U.S. & Canada (up 5.1% sequentially), 20% came from Europe (up 9.3%), Emerging markets 9% (up 7.4%), Asia Pacific 11% (down 0.4%) and Japan 4% (up 12.4%). All geographies declined on a year-over-year basis, with the exception of Japan , which increased 2%. This was mainly due to recession-related weakness, as a result of which growth came off a smaller base.

Revenue by Product Line
Routers were 17% of total revenue, representing a sequential increase of 5.2% and a year-over-year decline of 17.0%. All categories of routers, including low-, mid- and high-range, declined double-digits from the year-ago period.

Switches were 32% of revenue, flat sequentially and down 20.6% year over year, with modular and fixed switches contributing almost equally to the year-over-year decline.

Advanced Technologies generated 26% of revenue, up 13.6% sequentially and down 15.1% year over year. There was particular weakness in video systems, although unified communications and security were also significantly weaker than the year-ago quarter.

The Other segment brought in 5% of revenue, increasing 24.3% sequentially and 8.8% year over year, mainly due to the impact of the Pure Digital acquisition and strength in tele-presence.

Services generated 20% of total revenue, growing 0.8% sequentially and 7.4% year over year.

Gross Margin
The company generated a gross margin of 66.3% in the last quarter, which was a sequential increase of 94 bps and a year-over-year increase of 66 bps.

The product gross margin was 65.5%, up 167 bps sequentially and down 1bp year over year. The sequential increase was driven by lower discounts, increased cost savings and higher volumes shipped. The services gross margin declined 20 bps sequentially and increased 392 bps year over year. The sequential decline was on account of investment in certain projects, partially offset by volume. The year-over-year increase was driven by improved margins in both technical support and advanced services, as well as higher volumes.

Operating Performance
The operating expenses of $3.38 billion were higher than the previous quarter’s $3.35 billion. The operating margin was 28.8%, up 272 bps sequentially and down 98 bps year over year. The operating margin improvement was largely on account of cost controls, especially G&A (as a percentage of sales). G&A expenses were down 475 bps sequentially, although COGS, R&D and S&M also declined (as a percentage of sales).

On a pro forma basis, CSCO generated a net income of $2.26 billion, or a 25.1% net income margin compared to a $1.84 billion, or 21.5% in the previous quarter and $2.50 billion or 24.2% net income margin in the same quarter last year.

The fully diluted pro forma earnings per share (EPS) was $0.39, compared to $0.32 in the Jun quarter and $0.42 in the prior-year quarter. Our pro forma estimate excludes acquisition-related costs, deferred stock compensation and amortization of intangibles in the last quarter. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

On a fully diluted GAAP basis, the company recorded a net income of $1.79 billion ($0.30 per share) compared to $1.08 billion ($0.19 per share) in the previous quarter and $2.20 billion ($0.37 per share) in the prior-year quarter.

Balance Sheet
Inventories increased 1.4% to $1.09 billion, yielding inventory turns of 11.2x. Days sales outstanding (DSOs) were around 32 days. The company ended with a cash and investments balance of $35.37 billion, an increase of $364 million from the end of the previous quarter. In the first quarter, the company generated $1.49 billion cash from operations and spent $1.87 billion on share repurchases. Cisco had $10.27 billion in long term debt, amounting to a net cash balance of $25.09 billion. Including long term liabilities, the debt-cap ratio was a mere 27.9%.

In the second quarter, management expects revenue growth of 2-5% on a sequential basis and 1-4% on a year-over-year basis. The gross margin is expected to be 64-65%, operating expenses 37.5-38.5% of revenue, interest and other income of approximately $25 million, tax rate 22% and a decline in the weighted average share count of approximately 50 million. The company expects one-time charges, such as stock based compensation and acquisition-related expenses of around $0.06 to $0.08 per share. Management expects the company to generate operating cash flow of $1.8-2.1 billion.
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