All posts from Zacks
Zacks in Our Research. Your Success.,

Cisco's Long-Term View Disappoints, Revenue Outlook Down

Cisco Systems Inc. CSCO recently provided long-term (3-5 years) growth targets. Management now projects revenues to increase in the range of 1–3%, more or less stable margins and mid-single digit growth in earnings per share (EPS). Moreover, the company expects to return greater than 50% of free cash flow to shareholders.

Uninspiring Outlook Hurts Stock

Over the 3–5 year time frame, Cisco projects Infrastructure Platforms (Switching, NGN routing, Wireless, Data Center) revenues to remain almost flat, while Security, Applications and Services to grow low-mid teens, high-single digits – low teens and mid-single digits, respectively.  Other (SP Video hardware) revenues are projected to decline mid-single digits.

Notably, the current top-line growth projections were lower than the company’s previously provided long-term guidance at the end of calendar 2013. Per CRN, the company had then projected revenues to grow 3–6% throughout the next 3–5 years, which was also lower than the original 5–7% long-term outlook it gave in calendar 2012.

Cisco anticipates revenues of $48 billion at the end of fiscal 2017, which reflects a CAGR of 2% over 2014–2017, lower than its long-term outlook (2013). However, anticipated EPS of $2.39 in fiscal 2017, reflects CAGR of 6% over the same period, primarily backed by improving operating margin and stringent cost cutting.

Shares fell almost 2.4% in the next two trading sessions, reflecting the bearish stance of investors. We note that Cisco has underperformed the S&P 500 Index on a year-to-date basis. While the stock returned 3.6%, the index gained 8.3%.

Intensifying Competition Headwind

Cisco’s revenues are expected to decline in the range of 6–4% on a year-over-year basis in fourth-quarter fiscal 2017. The decline can primarily be attributable to lower order, which is impacted by intesifying competition from several smaller players like Huawei and Arista Networks ANET.

Moreover, growing competition from Facebook’s FB Open Compute Project (OCP) is impacting Cisco’s dominance in the switch market.

We also believe that ongoing transition to subscription-based model will continue to hurt the top-line growth at least in the near term.

Long-term Growth Drivers Exist

Nevertheless, increasing software mix – Cisco targets to deliver more than 30% of revenues (up from 19% in fiscal 2014) from software by fiscal 2020 – is a key catalyst. We note that software revenue is projected to improve at a CAGR of 12–15% over fiscal 2014–2020.

Moreover, Cisco is focused on re-aligning product portfolio towards Hybrid and Software-as-a-Service (SaaS) offerings, which will drive software revenues in the long haul. Additionally, the company expects recurring revenues to increase from an anticipated 30% in fiscal 2017 to more than 37% in fiscal 2020.

We also believe that Cisco’s expanding footprint in the rapidly growing Security market is promising. Per Gartner, worldwide spending on information security is expected to reach $90 billion in 2017, an increase of 7.6% over 2016, and to top $113 billion by 2020.

Zacks Rank & Key Pick

Cisco currently carries a Zacks Rank #4 (Sell). Extreme Networks EXTR with a Zacks Rank #2 (Buy) is a better-ranked stock worth watching in the same sector. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term EPS growth for Extreme Networks is currently pegged at 17%.

5 Trades Could Profit "Big-League" from Trump Policies

If the stocks above spark your interest, wait until you look into companies primed to make substantial gains from Washington's changing course.

Today Zacks reveals 5 tickers that could benefit from new trends like streamlined drug approvals, tariffs, lower taxes, higher interest rates, and spending surges in defense and infrastructure. See these buy recommendations now >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Cisco Systems, Inc. (CSCO): Free Stock Analysis Report
Extreme Networks, Inc. (EXTR): Free Stock Analysis Report
Facebook, Inc. (FB): Free Stock Analysis Report
Arista Networks, Inc. (ANET): Free Stock Analysis Report
To read this article on click here.