Cisco's Mixed Quarter Leaves Analysts With Mixed Views

Cisco CSCO reported its fourth quarter results Wednesday. The company earned $0.55 per share, $0.02 higher than analysts expected, while revenue of $12.4 billion came in $260 million higher than expected.

Shares of Cisco traded recently at $24.66, down 2.16 percent.

Product revenue declined two percent from a year ago to $9.53 billion, marking an improvement from last quarter's eight percent decline. Service revenue rose five percent to $2.83 billion, also marking an improvement from last quarter's three percent gain.

Cisco guided its first quarter revenue growth to be flat to one percent, while management expects to earn $0.51 to $0.53 in the coming quarter. Gross margin is expected to fall within the same 61 percent to 62 percent range.

Gross margin of 61.8 percent declined by 90 basis points from last quarter, but in-line with management's prior guidance of 61 percent to 62 percent.

During Cisco's conference call, CEO John Chambers hinted that the weakness seen in emerging markets has no near-term recovery expectations. In addition, carrier sales are expected to be weak for at least the next few quarters.

Below are three analyst views covering an Overweight rating (Morgan Stanley), a Buy rating (Bank of America) and a Neutral view (MKM Partners).

Morgan Stanley: Positive outlook for fiscal 2015

James Faucette of Morgan Stanley maintained an Overweight rating and $30 price target on Cisco on Thursday.

In a note to clients, Faucette stated that Cisco's orders and enterprise growth are “compelling” and demand for new products continues to build out.

“We estimate that total enterprise revenue was up nine percent year over year versus our estimate of enterprise being down four percent,” Faucette wrote in his note.

Emerging market issues are not unique to Cisco, as Faucette argues emerging market weakness is "consistent with recent global headlines."

Looking forward to fiscal 2015, the analyst lowered his earnings per share estimate to $2.17 from $2.29 while revenue is now expected to be $49.3 billion from $49.6 billion. The change is due to a more conservative approach on emerging markets and service provider spending.

Despite a lower 2015 estimate, Faucette argues that shares of Cisco are “still largely under-owned.” Additionally, the strong response to Cisco's Nexus 9K and ACI products could set the stage for revenue growth in the second half of fiscal 2015. As such, it is possible that that the bear case would be rebutted, leading to revenue and earnings upside in addition to multiple expansion.

Bank of America: Solid quarter, restructuring and tough environment ahead

Tal Liani of Bank of America maintained a Buy rating and $28 price target on Thursday.

In a note to clients, Liani wrote that Cisco has demonstrated a successful implementation of new strategies and new products that are generating meaningful demand.

“Cisco's switching portfolio shows some early signs of success, yet management is pointing to a gradual ramp over the next few quarter,” Liani wrote in his note. The analyst adds that Cisco is executing well in a tough environment, however the company faces several challenges ahead.

Cisco will see $700 million of charges in 2015, roughly half of it in the first quarter related to a realignment in its engineering group. The move is expected to reduce the company's total headcount by 6,000.

While a realignment and overhaul of an entire division is always difficult, the company still faces external risks in emerging markets. Cisco's management again warned investors that the success of its new 9000 switch and ACI software are somewhat cannibalistic in nature. According to Liani, this “should drive a slow start in the next two quarters.”

Looking forward Lian lowered his fiscal 2015 earnings per share estimate to $2.17 from a previous $2.18. Revenue expectations for fiscal 2015 are now $49.1162 billion, lowered from a previous $49.4057 billion.

MKM Partners: Decent results, guidance lower than expected

Michael Genovese of MKM Partners maintained a Neutral rating on Cisco with a $28 price target.

While Genovese's $28 price target matches the Buy rating set by Bank of America, the analyst notes that Cisco's quarterly results does not change the short-term view.

“Cisco's Service Provider orders fell 11 percent year over year in the July quarter, compared to down five percent in April,” Genovese wrote in his note. “Notwithstanding the fact that capex will be fairly weak in the second calendar half of 2014, Cisco's order performance in the first calendar half of 2014 demonstrates meaningful share loss in addition to soft carrier spending.”

Genovese expects Cisco to continue outperforming in the remainder of calendar 2014 with orders rising at or near a low-double-digit percentage point in the current quarter; this will likely be reported when the company announces its second quarter results in January.

“We still believe it is profitable to own Cisco when orders and revenue growth are accelerating,” Genovese wrote.

Looking forward, Genovese raises his fiscal 2015 revenue estimates to $49.40 billion from $49.14 billion. However, the analyst made no changes to his earnings per share estimates which remain unchanged at $2.25 per share.