What Wall Street Is Saying About Cisco's Q2 Report

Shares of Cisco Systems, Inc. CSCO hit a new multiyear high of $45.10 Thursday morning after the company's fiscal second-quarter earnings report came in better than expected and the low end of management's Q3 guidance exceeded Wall Street forecasts.

The Analysts

• Morgan Stanley's James Faucette maintains an Overweight rating on Cisco's stock with a price target boosted from $42 to $46.
• Bank of America Merrill Lynch's Tal Liani maintains a Buy rating on Cisco's stock with a price target boosted from $46 to $53.
• Stifel's Patrick Newton maintains a Hold rating on Cisco's stock with a price target boosted from $40 to $46.
• Cowen's Paul Silverstein maintains an Outperform rating on Cisco's stock with a price target boosted from $42 to $51.
• Nomura Instinet's Jeffrey Kvaal upgraded Cisco's stock rating from Neutral to Buy with a price target boosted from $33 to $46.
• KeyBanc Capital Markets' Alex Kurtz maintains an Overweight rating on Cisco's stock with a price target boosted from $43 to $49.

Morgan Stanley: Confidence In Long-Term Picture

One of the more notable aspects of Cisco's earnings report is the Catalyst 9K becoming the fastest-ramping new product introduction in the company's history, Faucette said in a note. Order volumes suggest the campus switching business is returning to growth sooner than expected, he said. 

Cisco's earnings report contained other positive signs of strength, Faucette said:

• Strength in infrastructure platforms from data center products.
• Public sector sales grew 8 percent despite expectations for a slowdown in federal spending.
• Public sector recurring revenue grew from 12 percent last quarter to 13 percent.
• The operating margin of 37.1 percent was 150 basis points better than expected, which implies continued improvements to the product mix.

BofA: Solid Execution

Cisco's Catalyst 9K switch more than doubled its customer base adoption, but the routing segment was simultaneously weak, Liani said in a note. New product lines and improved spending should help the routing segment later on this year, he said. 

The company showed it is executing well in its transition to software sales and recurring revenues, the analyst said. Recurring revenue growth rose from 31 percent a year ago to 33 percent, and strong underlying trends boosted deferred revenues, the analyst said. Deferred product revenue from recurring software and subscriptions rose 36 percent year-over-year.

Cisco's momentum in the quarter could result in its margins expanding from 64.1 percent to 64.5 percent within two years, Liani said. Higher revenue growth rates and an acceleration in share buybacks should result in 8 percent, 10 percent, and 7 percent earnings per share growth, respectively, in each of the coming three years, according to BofA. 

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Stifel: Concerns Remain

Cisco's earnings report consisted of four encouraging readouts, Newton said in a research report. The analyst highlighted the following:

• An "aggressive" commitment to return cash to shareholders.
• A shift to recurring revenue and subscription software sales.
• A desire for switching and routing segments to see sustainable growth ahead.
• The overall "breadth" of the company's security portfolio is attractive.

Despite these four encouraging data points, the stock's elevated valuation and potential risk of ongoing pressure in routing and switching excluding campus, especially in the service provider market, justifies a neutral stance on the stock, the analyst said. 

Cowen: Growth Is Here

Heading into Cisco's earnings report, the company was expected to signal that growth is on the horizon, Silverstein said in a note. Encouragingly, the report signaled that growth has arrived on the basis of broad-based improvements across multiple product lines, customers and geographies, the analyst said. 

Signs of growth can also be found in Cisco's cash operating cash flow in the quarter, Silverstein said. The company reported $4.1 billion of operating cash flow, which marks the company's strongest Q2 operating cash flow in its history and was $300 million above the same quarter one year ago. The quarter also showed the company's second-highest level of operating cash flow in history and fell just $60 million short of the peak level in the fourth quarter of 2015. 

Looking forward, Cisco is expected to sustain low-to-mid-single digit year-over-year revenue growth rate coupled with stable-to-improving margins over the next two to three years, according to Cowen. 

Elsewhere On The Street

• Cisco's web scale switching wins are "durable," and its campus switching momentum will likely be sustained through 2019, Nomura's Kvaal said in a research report.
• Cisco is executing well against its goal of transitioning toward a recurring software model, which should help to create a path toward $3 in fiscal 2019 earnings power, said KeyBanc's Kurtz.

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Photo courtesy of Cisco.