4 Themes For Cisco Systems Following Solid Q1 Print, Tepid Q2 Guide

Shares of Cisco Systems, Inc. CSCO fell 5 percent in the pre-market hours on Thursday as a weak second-quarter guidance offset the company’s solid first-quarter results, driven by higher orders from Security and Enterprise verticals.

Q2 Guide

The tepid second-quarter forecast was attributed to a 12 percent drop in Service Provider orders.

However, Deutsche Bank reiterated its Buy rating and $37 price target on Cisco shares, saying that the company’s positive mix shift to a software and recurring revenue model would boost its earnings and margins.

Cisco's 4 Themes

Analyst Vijay Bhagavath sees Cisco to “double down” inorganically with new products in the following mega themes:

1. ”Automation and Analytics — driving ‘structurally lower’ IT opex; we note +75 percent of IT Spending allocated for opex.”
2. “Zero Trust Security — CSCO driving market share leadership in ‘Perimeterless Security’ — which leverages CSCO’s entire networking portfolio and meaningfully scale CSCO’s share of wallet over the next few years.”
3. "Cloud Managed Services — scaling the Meraki model to ‘Cloud Manage’ a broad set of IT equipment.”
4. “Internet of Things and 5G — scaling CSCO’s networking hardware, software, and services portfolios for enabling connections among billions of Internet connected devices. 5G Wireless and Cloud Infrastructures would be key enablers of IOT, over the next decade.”

Expectations And Subsequent Moves

Bhagavath now expects second-quarter revenue/EPS of $11.56 billion/$0.55; prior $11.97 billion/$0.59. The analyst also maintains his +$3 in earnings power estimate for FY19.

Shares of Cisco closed Wednesday’s trading at $31.57. In the pre-market hours Thursday, the stock was seen down 5 percent at $29.99.