Q2 Preview: Cisco (CSCO) Should Report In-Line Results, Focus on Long-Term View

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CSCO Hot Sheet

Rating Summary:
25 Buy, 18 Hold, 1 Sell

Rating Trend: = Flat

Today's Overall Ratings:
Up: 0 | Down: 0 | New: 0

Shares of Cisco Systems (Nasdaq: CSCO) are trading lower Wednesday heading into its second-quarter earnings report.

Expected out after the market closes, Cisco should report a 16 percent gain in earnings to 43 cents per share on revenue of $11.23 billion.

Shares gained 6.4 percent through the quarter, to $19.65 at the end of January. The bump comes after Cisco ended 2011 considerably lower -- at least, in Cisco terms -- dropping 9.6 percent to $18.02.

If history has anything to say, then Cisco will probably top earnings by 8 percent to 9 percent, possibly coming in at 46 cents or 47 cents per share. However, investors have already likely priced in a beat. What isn't priced in is guidance.

Though getting better as economic conditions have improved, Cisco's CEO John Chambers came under fire at the end of 2010 and into 2011 after continually lowering expectations following the report. Shares even hit a mult-year low of $13.30 in early August, the lowest Cisco traded in probably a decade...even worse than after the financial fallout of 2008 - 09.

Data from Bloomberg has 27 analysts with a Buy rating, 18 at Hold, and 1 with a Sell. The Street's price target average is currently at $22, with a low of $19 and high of $26. Cisco has traded within a range of $13.30 to $22.15, with the latter coming almost exactly one year ago. The Street's price target also suggests about 9.2 percent of upside from current trading levels.

It should also be noted that there are equal amounts of volume at 21 calls and 19 puts for the February weekly contracts, expiring on February 10th. Open interest favors the 21 call, at about 28,500 contracts.

Analyst Comments

J.P. Morgan is modeling for earnings of 43 cents per share and revenue of $11.19 billion. JPMorgan commented that despite CapEx concerns weighing on service provider growth, healthier enterprise spending should offset the pressure.

JPMorgan also said it expects Cisco to "be supported by a reinvigorated sales force and focus on execution with product refreshes in multiple areas leading to potential share gains."

Finally, the firm noted, "Cisco [recently] announced it had reached over 10,000 UCS customers (3,000 in Europe). This implies Cisco added over 1,000 new customers in Q212 (added 1,572 to end Q112 with 8,983). However, we do flag potential softness ahead of the Romley upgrade cycle later this year."
Wells Fargo is modeling EPS of 43 cents and sales of $11.20 billion. On revs, Wells says its estimate comes from broad based order strength, strong deferred revenues, and a B:B of ~1 entering the period, commenting, "[i]mportantly, most of our channel contacts noted sequential growth in their Cisco business with many highlighting a more focused Cisco that appeared to be responding quickly to customer demands and moving aggressively to fend off competitive threats during the quarter."

Wells is looking for gross margin of 61.8 percent and operating margin of 26.4 percent.

The firm also sees upside to its switching estimate of $3.62 billion given positive NEXUS checks, improved execution, and share gains versus competitors Hewlett-Packard (NYSE: HPQ) and Juniper (Nasdaq: JNPR).
Wedbush sees EPS of 44 cents and revs of $11.21 billion. "Checks suggest that the company is gaining traction in the enterprise market in North America and in Europe but momentum was likely offset by a general slowdown in carrier CapEx — a market where the company generates ~25% of sales," commented Wedbush. "Note that the company appears to be executing relatively well, winning some core routing deals at Verizon during the quarter."

The firm's near-term chief concern is the overall spending environment.
Deutsche Bank sees earnings of 44 cents per share and revs of $11.1 billion. The firm sees little risk to January numbers and an improving fundamental outlook heading in the third-quarter of Cisco's fiscal 2012.

Deutsche commented, "We note robust activity in Data Center switching, security, collaboration, and in core routing, and moderate growth in campus networking. Across the theaters: trends in the US enterprise point to incrementally improving demand trends, parts of EMEA are holding up well, and we note near-term weakness in some emerging markets (India etc)."

The firm likes how U.S. enterprise and carrier markets are shaping up, as well as EMEA trends, but cautions on near-term weakness in emerging markets.
BGC Patners sees EPS of 45 cents and revs of $11.3 billion, commenting, "[w]e expect to see Cisco exhibit tight control of its operating expenses combined with a small lift in its gross margins from the recent trough. Revenue growth is likely to be challenged both in the quarter and fiscal year 2012."

BGC said Cisco has about 80 percent market share in switching and 70 percent in routing for the public sector, so a slowdown there will impact numbers.

Collaboration, wireless, and Data Center segments will also be in focus, with each posting impressive revenue gains through 2011.

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Cisco's past performance at Streetinsider's Cisco's Income Statement.

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