Cisco Systems, Inc. Earnings: Time to Light a Fire

Despite beating analyst estimates, and even more importantly significantly improving year over year on both the top and bottom lines, Cisco stock continues to be mired in a funk. Since reporting its fiscal Q2 earnings in February, Cisco shares are essentially right where they were three months ago, though its nearly 3% dividend yield does help ease the pain.

In other words, Q3 was a chance for Cisco to kick things in gear by reporting solid results that handily beat expectations. Both internal and consensus analyst estimates were for a 4.5% revenue improvement, to slightly over $12 billion compared to 2014's Q3 sales.

On the earnings-per-share front, again both the Street and Cisco concurred that the third quarter would generate $0.53 a share on a non-GAAP basis (excluding one-time items), compared with $0.51 last year. Would Cisco send longtime CEO John Chambers off to semi-retirement with a bang, or a whisper? Turns out, Cisco leaned toward a bang.

Just the factsIn its fiscal 2015 Q3, Cisco reported a solid $12.1 billion in revenue, a slightly better-than-expected 5.1% improvement over last year. Cisco also performed on both an earnings-per-share GAAP and non-GAAP basis, reporting $0.47 a share and $0.54, respectively. Both EPS results handily beat last year, by nearly 12% on a non-GAAP basis.

Cisco also demonstrated that it may have turned the corner as it implements several new, strategic efforts to shift revenue sources across multiple markets. The first nine months of its fiscal 2015, Cisco reported revenues of $36.3 billion, a 4.3% jump over the same period a year ago. But where Cisco really shined the past three quarters was per-share GAAP earnings. Its net income improved nearly 20% to $6.7 billion, compared to "just" $5.6 billion in fiscal 2014's first three quarters.

Strong management of cost of sales and operating expenses gave a boost to Cisco's EPS results. Despite the increase in revenues, Cisco wasn't forced to ramp-up its overhead to ignite sales. Cost of sales increased a mere $70 million in Q3, and actually declined about $50 billion over the past three quarters.

Adding to Cisco's EPS improvement was buying back another 35 million of its shares, decreasing the total number of outstanding shares by 157 million in its first three fiscal quarters. As for Cisco's balance sheet, it boosted cash and equivalents to $54.4 billion, up from $52.1 billion last year.

What really mattersAs Chambers said in response to those analyst's that questioned its shift to high-growth markets like the Internet of Everything, data centers, and secure cloud solutions: "they were wrong" Yes, Cisco continues to drive much of its revenues from its traditional networking and related sales, however, its new strategic direction is taking hold.

Data center sales, a key area as the IoE and cloud markets explode, continued to improve according to Chambers. With a run-rate over $3 billion, Cisco now boasts 85% of the entire Fortune 500 as clients. Cisco also announced yet two more new "IoE Innovation Centers:" one in Berlin, Germany, and another in Australia. Chambers reiterated the significant opportunity IoE represents and mentioned on more than one occasion that it will remain a "major" focus of Cisco's future.

Secure cloud solutions also play a key role in the "new" Cisco, and helped drive a 14% improvement in security-related revenues in Q3, along with a "record number of licenses." Going forward, Cisco expect revenue growth of 1% to 3% in Q4, along with non-GAAP EPS of $0.55 to $0.57.

Before saying his "goodbyes," Chambers urged patience: as he put it, when you offer, "solutions that initiate outcomes," they will drive growth and earnings once Cisco reaches its "inflection point." He certainly believes its inflection point is imminent, and Cisco appears to be on track to prove him correct.

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Tim Brugger has no position in any stocks mentioned. 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.

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