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Cisco's Good Quarter And Soft Guidance Keeps Goldman Neutral

Goldman Sachs maintained its Neutral rating on Cisco Systems, Inc. CSCO 0.73% following its better-than-expected fourth quarter earnings, but "soft" guidance for the first quarter.

Cisco reported fourth quarter sales/non-GAAP EPS at $12.6 billion/$0.63, versus GS estimate and the Street at $12.6 billion/$0.60.

The networking gear maker guided first quarter sales of $12.1-$12.4 billion versus prior GS/Street estimate at $12.5 billion, and EPS of $0.58-$0.60 versus GS and Street estimate at $0.60.

Goldman said Cisco's upside in enterprise and commercial/ switching revenues more than offset weaker service provider/routing. However, guidance was about 1 percent below expectations, driven by weakness in service provider (orders down 5 percent) and emerging markets (down 6 percent).

Analyst Simona Jankowski, who maintained $32 price target on the stock, had three key takeaways.

(1) "Cisco is tuning the business toward higher margins at the expense of top-line growth as part of its transition toward more software and recurring revenues (which rose to 28% of sales, up from 25% a year ago). Cisco has now missed its revenue growth target of 3-6% for 3 quarters and exceeded its operating margin target of 30% for 4 quarters, and we expect it to revise both accordingly at its analyst day later this year."

(2) "Cisco announced a 5,500 headcount reduction (less than press reports of 14,000) which will be substantially reinvested in higher growth areas of the business. That should help Cisco retain its operating leverage given headcount is at a 2-year high despite declining revenues."

(3) "Cisco continues to lag in its cloud/hyperscale exposure (which we estimate at just 3-4% of sales), reporting only 2% growth in sales to the top 10 web-scale customers, down from 31% last quarter. This compares to the combined capex for the top-5 up 27% yoy and Arista's revenues up 37% yoy in 2Q."

At time of writing, shares of Cisco were down 1.50 percent to $30.26.

Aug 2016KeyBancMaintainsOverweight
Aug 2016Deutsche BankMaintainsBuy
Aug 2016JMP SecuritiesMaintainsMarket Perform

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