Cisco Is 'Running Out Of Levers'

Credit Suisse’s Kulbinder Garcha expressed concern, noting that some of the levers Cisco Systems, Inc. CSCO has had to offset switching decline in recent quarters seem to be running out.

Garcha maintains an Underperform rating on the company, with a price target of $25.

Levers

The analyst pointed to the revenue decline in five of the company’s nine divisions in FQ1:17 as evidence of Cisco Systems “running out of levers”, given the datacenter and wireless segments, which had been seeing robust growth, had slipped into decline.

Q1

However, the company reported fobust results for Q1, with EPS of $0.61, ahead of the consensus, and executing on the cost front.

Garcha also mentioned that while Cisco Systems had executed well on the cost front, operating margins of 31.6 percent was a record high, and margins might have peaked, despite the company’s restructuring initiatives.

Net income for the quarter declined 4.4 percent, largely driven by restructuring charges.

The analyst expressed concern that “the switching business faces increasing pressures, as Cisco continues to lose market share in the datacenter switching segment.”

Guidance

On the other hand, the FQ2:17 revenue guidance was disappointing, with management guiding to a 3 percent year-on-year decline at the midpoint, and EPS of $0.55–$0.57, below the consensus forecast but in line with the estimate.

“Our long-term concerns remain that the company is increasingly challenged by SDN and continues to lose share in the 10GbE & above switching market,” Garcha stated.

At last check, Cisco was down 5.82 percent on the day at $29.73.