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Citi Expects Cisco Systems To Report In-Line Or Better Q3

Citi Expects Cisco Systems To Report In-Line Or Better Q3
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Cisco Systems, Inc. (NASDAQ: CSCO) will release its third-quarter numbers May 18, and Citi expects the networking gear maker to report EPS in line with consensus and revenue above Street view.


Analyst Jim Suva expects third-quarter EPS of $0.55 down 5 percent q/q, up 1 percent year-over-year, in line with consensus $0.55 and at the midpoint of guidance range of $0.54–$0.56.

The analyst estimate revenue of $12.05 billion, up 1.8 percent quarter-over-quarter, down less than 1 percent year-over-year, above consensus estimate of $11.97 billion and toward the higher end of guidance range of $11.7 billion–$12.08 billion.

Related Link: Upside Potential Unlocked At Cisco, Crowd Says

On gross margin, Suva models 62.9 percent, down 130 bps quarter-over-quarter, up 40 bps year-over-year, 30 bps below consensus estimates and at midpoint of guidance range of 62.5–63.5 percent.

In addition, the analyst projects operating margin of 29.6 percent, down 160 bps quarter-over-quarter, up 100 bps year-over-year, 20 bps above consensus estimates and slightly above guidance of 28.5–29.5 percent.

"We note many tech companies struggled to meet expectations recently and accordingly we view an in line quarter for Cisco as good enough to move the shares higher," Suva wrote in a note.

Rating, Price Target And Justification

Shares of Cisco have dropped more than 3 percent on weakness in enterprise firms. But, while reiterating his Buy rating and $30 target price, Suva noted that Cisco is able to offset the slowdown in switching revenue with strong growth in security software via SourceFire products.

In addition, a steady routing business and increased spend in Meraki WiFi would benefit Cisco, which of late is selling more software products as it generates recurring revenue stream and insulates the company from the slowdown in enterprise spending on hardware.

"Cisco is profiting from three of technology's fastest growing trends, cyber security, data analytics and IoT," Suva noted.

Further, the shares would benefit from a strong dividend yield of about 4 percent, and cash flow generation (more than 60 billion in cash/short term investments).

Competition In The Space

Among the competitors, Juniper Networks, Inc. (NYSE: JNPR) pre-announced on April 11, citing lower revenues and EPS due to weaker-than-anticipated demand from enterprise, and timing of deployments of certain U.S. and EMEA telecoms.

"Given the recent decline in NA service provider capital spending has been a drag on equipment vendor revenue but the potential spending to stabilize suggests improvement in their growth as the year unfolds," Suva highlighted.

Related Link: Oppenheimer Warns Cisco's Outlook Could Be At Risk; Maintains Outperform Ahead Of Q3 Results

Cisco also faces strong competition from Arista Networks Inc (NYSE: ANET), which the analyst says "continues to take share in the growing $9 billion Data Center switching market" on strong growth in enterprise and cloud customers. Meanwhile, Huawei continues to ramp their data centers and presence in Asia, Europe and Latin America.

Sector-Wide Commentary

On the networking industry, Suva noted, "Most expectations are guiding towards a relatively flat networking spend in 2016 as the shift in networking capacity continues, driven by the cloud and data centers."

"In the world of SDN (Software-defined networking (SDN), there's a need for greater adoption of virtualized security software, including the virtualized firewalls. Given Cisco's extensive networking portfolio, we believe they are well positioned to take advantage of the evolving trends," Suva added.

According to TipRanks, Suva has a success rate of 48 percent with an average return per recommendation of +8.2 percent. The analyst is ranked 364 out of 3,913 analysts.

Shares of Cisco closed Wednesday's regular trading at $26.70.

Latest Ratings for CSCO

Jan 2018Bank of AmericaUpgradesNeutralBuy
Dec 2017Stifel NicolausReinstatesHoldHold
Nov 2017ArgusMaintainsBuy

View More Analyst Ratings for CSCO
View the Latest Analyst Ratings

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