Thursday, November 09, 2006

Color on quarter: Cisco Systems (NASDAQ:CSCO)

Several firms are commenting on Cisco Systems (NASDAQ:CSCO) after the co issued very strong results and good guidance last night:

- JP Morgan has one of the best summaries Cisco reported another extremely strong quarter, as revenue upside came from BOTH the core business AND SFA. Guidance again was extremely strong - esp for SFA - backing firm's thesis that SFA is opening-up new product cycles and
reinvigorating top-line growth, while providing cover for Cisco to become more aggressive in its core business. They cont to expect multiples to expand as Cisco remains on the offense. Reits OW.

One of the most impressive parts of the quarter was truly the broad-based revenue strength. Chambers said that eight of Cisco's top ten revenue products grew more than 20% y/y, and revenue growth was also strong across geographies, product lines, and customer sets. As a result, Core CSCO revenue grew 16% y/y to $7,600M, $237M ahead of both firm's estimate and guidance of 11-13% y/y growth, marking the highest y/y growth rate for core Cisco revenues in a quarter since the October, 2003 quarter, a full 3 years ago!

While gross margin of 64.8% fell 50 basis points q/q - most of which, they believe, happened within core Cisco since the richer mix of the higher margin Networks revenues within Scientific Atlanta this quarter would imply that SA's gross margin was flat to up - the firm believes that Cisco may be testing the elasticity of demand on a number of product lines, providing discounts, which in turn helped generate the 16% y/y growth this quarter in Cisco's core business. They therefore believe at least part of the core Cisco tailwind might be being driven by a more aggressive pricing stance at Cisco, a trend the firm expects to continue.

On the other hand, at the high end of Cisco's core guidance - i.e. 15% y/y growth in the core - SFA could grow a more normal 15% itself, but then total company revenue growth would never get anywhere near the top end of the total company guidance range of 24-25%. What this means is that the only way for the total company to hit the top end of the 24-25% guidance range - i.e. 25% - is either for core to grow 15% and SFA grow a blistering 25%, or for the core to grow faster than 15%, i.e. above guidance.

Bottom-line, Cisco continues to perform extremely well on all fronts, boosted both by strength at SFA and synergies with the core Cisco business, and also by a tailwind in its core enterprise and service provider businesses as the company continues to expand into emerging markets, commercial domestic customers and other new segments.

- Raymond James notes Cisco experienced broad based order growth across most geographies. Of note, they highlight US and Emerging Market, which experienced year-over-year order
growth of 17-19% and 43%, respectively. Firm would note that Europe continues to rebound with order growth increasing to double digits from high single digits in July. From a segment perspective Cisco is seeing strong order growth from all latforms. Of note, the firm highlights strength in service provider and commercial platforms with order growth of 22-24% and 20%, respectively. They are increasing their price target to $31 from $25. Reit Strong Buy as they believe Cisco continues to run on all cylinders.

- Merrill Lynch ups their tgt to $30 from $27. Maintains Buy.

Notablecalls: Looks like Goldman was right after all with their aggressive call ahead of the release. I continue to be pessimistic about 2007. With the stock almost vertical over the past couple of months (hit almost $27 in after hrs trading) I'd be watching for cracks in buy interest today and tomorrow. Everything's just too good to be true.

1 comment: said...

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