Cisco (
CSCO
) announced a solid set of Q1 FY 2013 results November 13th as
revenues grew close to 6% and operating income 20% over the
same period last year. The networking giant continued to perform
better than rivals such as
Juniper Networks
(
JNPR
) despite a challenging macro-environment - a good sign
that its turnaround efforts in shoring up key routing and switching
businesses are paying off. Macro-economic concerns surrounding
the Euro debt crisis however continued to weigh on network spending
in Europe, which accounts for close to 20% of Cisco's revenues.
This was however largely offset by sales in the U.S. which
sustained its recent strong showing and the emerging markets
in Asia-Pacific which grew at a healthy 10% y-o-y.
Cisco's strong showing this quarter, on the back of an improving
business outlook in the U.S., helped the company's stock jump
almost 9% in post-market trading after the results were announced.
However, we see far more value in the stock coming from Cisco's
renewed focus on its networking division. The networking giant
has of late tried to scale back its ambitions to diversify into 30
new businesses and instead focus on those areas that add value to
its core routing and switching businesses. As a result, it has
restructured its operations and cut jobs in areas that are not its
core focus, making the organization leaner and more efficient.
See our full analysis on Cisco
We believe the company is going in the right direction since the
moves not only allow it to innovate faster but also streamline
its businesses around its core networking products that contribute
almost 40% to our estimated
$26.50 fair value for Cisco
, with cash contributing another 20%. At the same time, it helps
Cisco benefit more from the long-term growth trends of data demand
and cloud computing which continue to remain sharp. Our price
estimate is about 45% ahead of the current market price.
Margins stabilizing
The cost cutting and restructuring seems to be paying off for
the company not only in terms of market share gains but also
operating margins which are stabilizing at >20% levels, after
having fluctuated widely in recent quarters. This increases
confidence in the management's guidance of achieving a long-term
operating margins in the mid-20s and increasing profits at a faster
pace than revenues. Cisco has realized almost all of the expected
$1.1 billion in severance charges related to the workforce
reduction program it had announced in July 2011, and the operating
margins should remain fairly stable from hereon. With savings
achieved on the operating side, Cisco will be able to make
aggressive price cuts to compete better with low-cost rivals and
gain even more market share.
Fundamentals drive Cisco's future earnings
As for top-line growth, we believe Cisco's fundamentals remain
solid due to the ongoing transition from wired to wireless
networks, the burgeoning usage of data on both mobile and
wired networks as well as a strong demand for cloud-computing
routing solutions on the enterprise side. The company
recently debuted its virtual cloud-routing and WAN
optimization platform under the Cisco Cloud Connected Solution
brand to enable businesses that are increasingly looking to
move their applications to the cloud at a low cost.
(see Cisco's Worth $23 On Cloud Foray And Enterprise Strength)
Its recent move to acquire NDS Corp was made to drive
device-agnostic video consumption and increase the demand for
its routers and switches among service providers that are looking
to monetize the booming data demand. (see Cisco's NDS
Acquisition Taps Video Demand To Boost Network Equipment
Business)
What was reassuring this quarter was that despite a challenging
macro-environment, Cisco's revenues from enterprises and service
providers in the U.S. saw a strong y-o-y growth of 9% and 13%
respectively. U.S.' return to strength is a big boost for Cisco,
since almost 60% of its revenues come from the region. Moreover,
with wireless carriers such as AT&T recently announcing almost
$14 billion in network spending over the next three years and
Sprint building out its LTE network aggressively, emboldened by its
recent deal with Softbank, Cisco's revenues from the U.S. could see
a nice boost in the coming years.
Overall, we believe that Cisco has executed well on its
turnaround plans so far and is well-positioned with its new-found
focus to gain even higher ground going forward. (see Cisco's
Post-Earnings Crash Makes The Stock Look Incredibly Cheap) The
company's dominant market position as well as aggressive price cuts
have helped it gain market share from rivals Juniper and
Alcatel-Lucent in an uncertain economic environment so far, and
could help it even further when the concerns subside.
However, Alcatel Lucent's recent foray into core routers
poses a downside risk for Cisco seeing as the former is #2 in edge
router market share - a position of strength that it can
effectively leverage to provide an end-to-end solution to its
customers.
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