Color on quarter: Cisco Systems (NASDAQ:CSCO)

Several firms are commenting on Cisco Systems (NASDAQ:CSCO) after the co managed to report strong results and provide strong guidance last night:

- JP Morgan notes that at the risk of sounding like a broken record, Cisco reported YET ANOTHER extremely strong quarter, with revenue upside AGAIN coming from BOTH the core business AND SFA. Revenue growth was again very strong nearly across the board, driving core Cisco revenue growth of 17.7% y/y to $7,800M, $144M ahead of firm's estimate and guidance for 14-15% y/y growth, the fastest pace of core Cisco revenue growth since the July 2004 quarter, TEN quarters ago. Cisco saw strong growth across geographies, product groups, and customer categories.

Firm's one area of concern in the quarter is the health of the U.S. enterprise business, as order growth in the U.S. enterprise business slowed to "mid-single digits" y/y from 20% in Q1. They believe the slowing could be just as much a function of the tough >20% y/y comp from Q206 than anything, since mgmt expects growth to accelerate to 10% y/y in Q3 based on customer conversations and its sales pipeline. Furthermore, management also mentioned that it is seeing more orders from global companies placed internationally rather than the U.S., implying a mix-shift could be distorting the U.S. order growth trends.

Astonishingly, Chambers also said he expects the torrid 40% y/y order growth pace in emerging markets to continue for the next 18-24 months, and that emerging markets order growth could continue to be double developed markets.

The pace of hiring actually accelerated in Q2, further proving management confidence in the longevity of the company's growth spurt, as Cisco hired an astonishingly high 2,732 people, up 42% from the 1,914 hired during Q1, and more than doubled its sales adds from Q1 to 650. Management said it continues to see near-term payback from hiring, implying that as Cisco has more feet on the Street, revenue growth could actually accelerate.

JPM notes they believe now more than ever that their thesis is playing out, and that the combination of the SFA acquisition and Cisco's renewed appetite for growth from both new technologies (video) and new markets (emerging markets, commercial market) continues to accelerate earnings growth. They continue to expect multiples to expand as Cisco remains on the offense, and with Cisco trading at 16.8x new CY08 EPS est of $1.62 (ex-stock comp), nearly at parity to peer JNPR at 17.3x, they remain Overweight.

- Morgan Stanley notes that strong results and guidance driven by routers, video and set top
box demand, reinforce their view that recent concerns over a potential slowdown in near-term revenue growth were overdone. Firm continues to believe that Cisco is the best-positioned company in the sector to benefit from transitions across enterprise, service provider, and increasingly consumer networks, raise price target to $32, and reiterate Overweight-V rating.

Results easily beat expectations driven by better than expected router and services revenue and broad strength across almost all geographies and end markets. A book to bill above 1.0 in both the core Cisco business and Scientific Atlanta, increasing deferred revenue, and guidance ahead of firm's estimates lead them to raise their F2007 expectations. Firm now models organic revenue growth of 16.4%, up from prior estimate of 14.7% and calendar 2007 adjusted EPS estimate moves up 3 cents to $1.42.

Notes they were buyers of shares ahead of the quarter and they are buyers today. Shares trade at 19x C2007 EPS and 17x C2008 EPS (excluding options) relative to group averages of 24x and 19x respectively.

- Merrill Lynch says they were impressed with the resilience in gross margin, even as low margin segments (mainly SFA and Advanced Svcs) grew well. Cisco also demonstrated cost discipline, with operating margin expanding from 29.2% to 29.8% QoQ. Nevertheless, the firm believes margins are peaking and should be flat to down in April as sequential growth will again be driven by SFA and Advanced Services, both of which carry mid-40% gross margins.

It's hard not to like Cisco's stock after such a solid result. Yet, despite some near-term upside potential, they are maintaining their recently instituted Neutral. Firm believes that a few of the growth drivers will start to moderate after the July Q, such as SFA, routing, and the impact of a larger sales team. They also believe shares are already trading at fair value.

- Banc of America has cautious comments on CSCO noting that although revenue guidance was strong, there was not much EPS pull through. Cisco reported solid 2QF07 results and revenue guidance, with SFA representing a little more of the upside and the product book-to-bill over 1.0. Firm remains Neutral on the stock as they expect slower growth in coming qtrs, with only limited leverage remaining in the model.

Unlike some of its smaller competitors, CSCO only grew its US enterprise orders by mid-single digits. While the firm believe timing of revenue recognition could be to blame, they view this performance, coupled with 10% growth guidance for April, as a sign that mkt share gains are becoming more challenging.

A growing contribution from the company's advanced service business, particularly in the emerging markets. This effort has been placing pressure on the company's service margins which have declined from nearly 68% during 3QF06 to 64.4% during the current quarter. The company expects these margins to remain near current levels through F07.

The company added ~650 new sales people during the quarter and reiterated its commitment to these hiring and product development efforts. As a result, the company expects opex to tick up, causing operating margins to dip back below the 30% level over the next several quarters.

With Y/Y growth rates for the overall company expected to decline in each of the next six quarters (Core business is expected to follow a similar trajectory) and margins near peak levels, the firm sees limited opportunity for multiple expansion from current levels. Maintains $30 tgt.

Notablecalls: The slowdown in U.S. enterprise business orders is likely going to hold back the stock. Not saying it's an outright short but I wouldn't be buying it either.