Citi: 3 Positives And 3 Negatives For Cisco

Cisco Systems, Inc. CSCO reported better-than-expected FQ3 earnings and announced a higher outlook, despite a challenging enterprise spending environment. Citi’s Jim Suva reiterated a Buy rating for the company, with a price target of $30. The analyst said Cisco was the Top Pick among IT hardware stocks.

“The most impressive aspect of both the results and outlook is that Cisco is directly countering the fear of commoditized software defined networking and white box pressure with strength showing gross margins much better than expected,” analyst Jim Suva mentioned.

Cisco should continue to exhibit operating strength, dispelling investor fears and resulting in EPS that would lend upside to shares, Suva added.

Positives

The analyst enumerated 3 positives as:

1. Despite several signs of a slowdown in enterprise spending, Cisco reported a sales and EPS beat. The company also announced its guidance ahead of expectations.
2. Cisco achieved strong gross margins of 65.2 percent, and projected 63-64 percent for the July quarter, both figures above consensus expectations. “This is meaningful in our view, as it directly counters the fears of pricing pressure and shift in spending to SDN and white boxes,” Suva wrote.
3. Both Services and Security beat consensus. Taken together, these segments now contribute 30 percent of Cisco’s total revenues. The analyst identified this as being “key to our positive view on Cisco,” saying that the company has “aggressively adapted to the new era of Cloud computing with the important focus on service and security.”

Negatives

Suva enumerated 3 negatives as:

1. Products missed consensus expectations, as both Switching and NGN Routing coming in below the consensus estimates. These two segments represent 45 percent of Cisco’s total sales. Data Center and Wireless also missed expectations.
2. Cisco guided to y/y sales growth of flat to +3 percent, which is below its long-term goal of 3-6 percent. This is justified, however, since the current enterprise spending environment is weak.
3. Cisco bought back shares worth merely $649 million in the quarter, significantly below the $1.2 billion used during each of the past two quarters.