Cisco's sales in the latest quarter rose just 4.4 per cent from last year, as customers in Southern Europe were in the grips of a recession and government customers on both sides of the Atlantic held back. Cisco's long-term goal is for annual growth of 5 per cent to 7 per cent.
The results announced Wednesday beat Wall Street's muted expectations, and Cisco raised its dividend by 75 per cent. The new quarterly dividend of 14 cents per share represents an annual yield of 3.2 per cent of Cisco's stock price, a relatively high yield for a technology company.
Cisco started paying a dividend in April 2011. The dividend and the increase announced Wednesday reflect Cisco's transition from an enterprise growing at Internet speed to a mature one that's subject to the same cycles as major industrial manufacturers. It no longer needs to invest as much of the cash it makes in its own business, so it can give it to shareholders instead.
But the higher dividend doesn't necessarily mean Cisco will give shareholders more cash overall, as it has a buyback program as well and could reduce the pace of buybacks to free up cash for the dividend.
Cisco said it's committing to returning to shareholders at least 50 per cent of its free cash flow, or the cash it pulls in after expenses and capital investment. In the fiscal year that just ended, it returned $5.9 billion to shareholders in buybacks and dividend, which was already more than 50 per cent of free cash flow.
Analysts pressed Cisco executives on the issue, but got no clear answer. During a conference call to discuss results, Chief Financial Officer Frank Calderoni said Cisco would be "opportunistic" about the buybacks.
The amount of cash Cisco can hand over to shareholders is limited by its strategy of leaving most of the money it makes from overseas sales in overseas accounts. That's done to avoid the relatively high U.S. corporate income tax. Cisco executives said that strategy would remain, and it would continue to work for a lowering of the U.S. tax rate.
The dividend also reflects a belief that the global economy will pick up again, and that Cisco will come strong out of the downturn. As a maker of big-ticket capital equipment, Cisco is sensitive to economic cycles.
"We wouldn't have done the dividend commitment and the cash commitment if we didn't see stabilization in our business and had good confidence going forward," CEO John Chambers said on the call. He emphasized that Cisco was still seeing growth, even as competitors saw shrinking sales.
"But I don't want to mislead you: Europe is going to get worse before it gets better, and federal government spending is not going to improve in the short term here in the U.S.," he added.
Cisco said it earned $1.9 billion, or 36 cents per share, in its fiscal fourth quarter, which spanned May to July. That's a 56 per cent increase from $1.2 billion, or 22 cents per share, in the same period a year ago.
Excluding the cost of stock-based compensation, restructuring costs and other items, Cisco said it would have earned 47 cents per share, up from 40 cents per share earned last year.
On that basis, Cisco's earnings were 2 cents above the average analyst estimate, as polled by FactSet.
Revenue of $11.7 billion beat estimates and compares with $11.2 billion a year ago. The Americas, chiefly the U.S., accounted for most of the increase. Sales there grew 7 per cent, while Europe, the Middle East and Africa fell about 5 per cent. In Eastern Asia, Cisco's smallest geographic segment, sales grew 9 per cent.
Among product segments, Cisco's bread-and-butter products, switches and routers, met expectations, while sales of cable-TV equipment and corporate videoconferencing setups declined.
Shares of the San Jose, Calif., company rose 86 cents, or 5 per cent, to $18.21 in extended trading, after the release of the results. That's the highest level for the shares since May, when Cisco warned that economic weakness in Europe would hold it back.
Calderoni said Cisco expects to earn 45 cents to 47 cents per share in the quarter that just started. That brackets the average analyst forecast, at 46 cents.
Cisco said it expects revenue of $11.5 billion to $11.9 billion in the new quarter, with the high end of the range achievable when including sales from NDS, a video-equipment company Cisco just bought. Analysts were expecting $11.7 billion in revenue, but not all of them are including the effect of the NDS acquisition in their estimates.
The acquisition will not affect earnings in the current quarter, Cisco said.
For the full fiscal year, Cisco earned $8.04 billion, or $1.49 per share. That was up 24 per cent from $6.49 billion, or $1.17 per share, in fiscal 2011.
Revenue was $46.1 billion, up 7 per cent from $43.2 billion in the previous year.