The Key Headwind For Cisco Is Order Flow

Cisco Systems, Inc. CSCO reported a steep sequential decline in Service Provider (SP) order flow in Q1 2017.

Pacific Crest’s Alex Kurtz maintained an Overweight rating on the company, with a price target of $33.

SP order flow declined 12 percent globally, with most of the headwinds coming from the U.S. market. This drove down the Q2 guidance, despite the robust results from U.S. federal and enterprise.

“Strong product gross margin and opex control keeps leverage largely intact and ready to drive EPS upside in F2018 when SP spending could stabilize,” Kurtz mentioned.

The company stated that there were headwinds in the U.S. commercial segment, with modest order weakness, which led to the overall order growth decline.

“The SP weakness was attributed to ongoing tightening capex, some mergers leading to a pause in spending and the transition to a new Republican-controlled congress,” the analyst mentioned.

Buy On Pullback

Kurtz sees any significant pullback in the stock as a buying opportunity, given the ongoing refresh opportunities in the campus market, along with pull through incremental wireless and security demand.

The analyst also believes that the UCS products could re-catalyze growth for Cisco Systems’ key platform starting in the first half of 2017, while the overall positive product margin trends indicate minimal price competition.

The stock declined 4.5 percent driven by the weak outlook.