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<ul><li><p>8/11/2019 Zacks Csco 08 07</p><p> 1/8</p><p> Copyright 2007, Zacks Investment Research. All Rights Reserved.</p><p>Cisco Systems (CSCO NASDAQ) $29.8Note: All new or revised material since the last report is highlighted.</p><p>Reason for Report: Minor Model Revisions; Final Version PreviousEdition: May 23, 2007</p><p>Recent News-Summary</p><p>On July 10, 2007, CSCO, EMC and MSF announced the formation of an alliance of technology vendors.</p><p>On June27, 2007, CSCO unwired the Linux Symposium.</p><p>On June 14, 2007, CSCO and IBM announced an expansion of their alliance to centralize servicmanagement for service providers.</p><p>On June 14, 2007, CSCO announced the completion of the BroadWare Technologiesacquisition.</p><p>On May 29, 2007, CSCO announced the completion ofthe WebExacquisition.</p><p>On May 22, 2007, CSCO announced the completion of tender offer of WEBX.</p><p>On May 21, 2007, CSCO agreedto acquire privately-held BroadWare Technologies.</p><p>On May 08, 2007, CSCO reported its 3Q07 results.</p><p>Overview</p><p>Key investment considerations as identified by analysts are as follows:</p><p>Key Positive Arguments Key Negative Arguments</p><p>Strong Market Leadership:Cisco dominates datanetworking in the enterprise arena with end-to-endsolutions that offer total cost of ownershipadvantagesover competitors.</p><p>Enterprise Spending: Investment in newtechnologies has paid off as new products aregrowing rapidly.</p><p>Revenue Opportunity: Six key areas of growth(Security, VoIP, Wireless LAN, Optical, HomeNetworking, and Storage) have the potential togenerate billions in revenue per year.</p><p>SFA Acquisition: The acquisition of SFA isexpected to be accretive to FY07 earnings.</p><p>Saturating Markets:Growth in the enterprise datnetworking market is slowing, attributable to marksaturation and overcapacity.</p><p>Impact of New Technology: Growth in ne</p><p>technologies could have a smaller-than-expecteimpact on large revenue base.</p><p>Increased Competition: Commoditization of somproducts could hurt pricing, as competitors (e.gDell)releaselow-end products.</p><p>Pricing Pressure: The Company is expected tface increased pricing pressure as a number oAsian vendors (especially from China) begin to enteitsglobal markets.</p><p>July 13, 2007</p><p>Zacks Digest of Brokerage Editor: Ian Madsen, CFAResearch Tel.: 1-800-767-3771, ext. 399</p><p>Email:</p><p> 111 N. Canal Street, Suite 1101 Chicago, IL 60606</p></li><li><p>8/11/2019 Zacks Csco 08 07</p><p> 2/8Zacks Investment Research Page 2</p><p>Cisco Systems (CSCO or the Company), based in San Jose, California, is the leading provider of datnetworking equipment to enterprise and government customers with end-to-end solutions and is thfourth largest provider of equipment to telecommunications service providers. The Company s InterneProtocol (IP) based networking solutions form the foundation for the Internet.</p><p>The Company also provides networking products for transporting data, voice, and video withibuildings and across campuses and offers routers that interconnect computer networks by moving datavoice, and video from one network to another; and switching systems that are used to build local-arenetworks (LAN), metropolitan-area networks, and wide-area networks. Technology productscomprishome networking products that enable users to share Internet access, printers, music, movies, angames; Internet protocol telephony products for transmitting voice communications; optical networkinproducts, which provide a path for telecommunications carriers, as well as for carriers and enterprisesand security products, which protect information systems from unauthorized use. It also offers storagnetworking products that deliver connectivity between servers and storage systems. In addition, thCompany offers wireless LAN and outdoor wireless bridging products. For further information, pleasvisit:</p><p>Note: CSCO s fiscal year ends on July 31; fiscal references differ from the calendar year</p><p>Recent News</p><p>On July 10, 2007, CSCO, EMC and MSF announced the formation of an alliance of technology vendorthat will offer one of the most comprehensive, security-enhanced, commercial, multi-vendor, end- to-eninformation-sharing technology architectures for helping protect and share sensitive governmeninformation.</p><p>On June 27, 2007, Cisco announced that the Cisco Unified Wireless Network and its outdoor wirelesnetwork solutions will constitute the wireless access network of choice for Linux and open sourcenthusiasts who attend the Linux Symposium in Ottawa this week .</p><p>On June 14, 2007 CSCO and IBM announced an expansion of their existing strategic alliance to delivenew standards-based telecommunications service assurance and fault-management solutions.</p><p>On June 11, 2007 CSCO announced its completion of the acquisition of privately held BroadWarTechnologies, a leading provider of IP-based video surveillance software.</p><p>On May 29, 2007 CSCO announced the completion of its acquisition of WebEx Communications, Inc, market leader in on-demand collaboration applications.</p><p>On May 22, 2007, CSCO announced the completion of its tender offer for all outstanding shares oWebEx Communications, Inc. (WEBX).</p><p>On May 21, 2007, CSCO announced a definitive agreement to acquire privately-held BroadWarTechnologies, a leading provider of IP-based video surveillance software. BroadWare's software enableweb-based monitoring, management, recording and storage of audio and video that can be accesseanywhere by authorized users.</p><p>On May 08, 2007, CSCO reported 3Q07 results. Highlights are as follows:Net Sales: $8.9 billionNet Income: $1.9 billion GAAP; $2.1 billion non-GAAPEarnings per Share: $0.30 GAAP; $0.34 non-GAAP</p></li><li><p>8/11/2019 Zacks Csco 08 07</p><p> 3/8Zacks Investment Research Page 3</p><p>Revenue</p><p>Total Rev. ($ in m)FY Ends July 31 2005A 2006A 1Q07A 2Q07A 3Q07A 4Q07E 2007E 2008E</p><p>Digest Average $24,801 $28,484 $8,184 $8,439 $8,866 $9,287 $34,776 $39,665</p><p>Digest High $24,801 $28,484 $8,185 $8,440 $8,866 $9,362 $34,851 $40,528</p><p>Digest Low $24,801 $28,480 $8,180 $8,439 $8,866 $9,221 $34,710 $38,650</p><p>Digest Average Y-o-Y Growth 14.8% 24.9% 27.3% 21.1% 16.3% 22.1% 14.1%</p><p>Quarterly growth 2.5% 3.1% 5.1% 4.8%</p><p>3Q07 total revenue was $8.9 billion, up 5% sequentially and 21% y/y, marking the sixth consecutivquarter of sequential growth and the fifteenth quarter of y/y growth. Revenue out performance was seeas driven by the Advanced Technologies and Other segments, primarily based on stronger-thanexpected Scientific-Atlanta (SFA) sales. Scientific-Atlanta, Inc., acquired on February 24, 2006contributed net sales of $752 million during 3Q07, compared with $407 million during 3Q06. The Ciscstand-alone revenue increase was approximately 17%, which continues to be one of the fastest standalone y/y revenue growth rates seen in several years.</p><p>Upside in the quarter was seen as broad-based across each of Cisco's business segments. One fir</p><p>believes Cisco will continue to post strong results in the next one to two quarters as it benefits fromcontinued market share gains,healthy backlog, and improved visibility.</p><p>According to analysts, ordergrowth continued to be very solid, with product book-to-bill of greater than 1Product order growth from a Cisco stand-alone perspective, that is not including Scientific Atlanta, grewin the mid-teens. Revenue growth from Scientific Atlanta was approximately 30% y/y, aligned to conformto Cisco's fiscal quarters.</p><p>Rev ($ in M)FY Ends July 31 3Q07A</p><p>Q/Q %Change</p><p>Y/Y %Change 4Q07E 2005A 2006A 2007E 2008E</p><p>Routers $1,763 5.2% 16.0% $1,901 $5,498 $6,005 $6,938 $7,844</p><p>Switches $3,087 2.5% 14.8% $3,217 $10,104 $10,843 $12,343 $13,557</p><p>Advanced Tech $2,082 8.1% 23.2% $2,239 $4,408 $6,032 $8,113 $9,973</p><p>Other $551 14.2% 114.4% $529 $843 $914 $2,011 $2,213</p><p>Product $7,481 5.4% 21.5% $7,760 $20,853 $23,918 $29,091 $33,147</p><p>Services $1,385 3.3% 18.7% $1,410 $3,948 $4,567 $5,374 $6,203</p><p>TOTAL REVENUE $8,866 5.1% 21.1% $9,287 $24,801 $28,484 $34,776 $39,665</p><p>Routers (20% of 3Q07 Total Revenue): Router revenue of $1.8 billion was up 5% sequentially an16% y/y, driven by strength in the high-end router portfolio consisting of the CRS-1, GRS, and 7600CRS-1 core router orders of $250 million demonstrated continued acceleration (revenue in 2Q07 wa$150 million, though order numbers were not given). According to Infonetics, Cisco increased its markeshare of the core router market to 59% in 3Q07, up from 58% q/q and 53% y/y. Cisco's edge routemarket share also increased to 52%, up from 51% q/q and 46% y/y.</p><p>Switches (35% of 3Q07 Total Revenue): Switches revenue stood at $3.1 billion, up 3% sequentialand 15% y/y. Management mentioned the Catalyst 6k family of switches is Cisco's largest single producfamily by revenue. Cisco s commentary surrounding U.S. enterprise was consistent with 2Q07, witbookings showing mid-single digit growth amidst a somewhat "cautious" spending environment. ThCompany highlighted positive growth in both its fixed and modular switching solutions during 3Q07though also highlighting the fact that forthcoming product refreshes could have tempered near-termdemand.</p></li><li><p>8/11/2019 Zacks Csco 08 07</p><p> 4/8Zacks Investment Research Page 4</p><p>Advanced Technology (23% of 3Q07 Total Revenue): Advanced Technology revenue of $2.1 billiowas up 8% sequentially and 23% y/y excluding Scientific-Atlanta's contribution to Advanced Technologrevenue of $589 million. Scientific-Atlanta revenue increased 32% y/y based on international expansiona shift to HD set-top boxes, network upgrades, and increased demand in anticipation of the July 1 FCCSeparable Security Deadline.</p><p>According to analysts, storage was again the fastest growing segment within Advanced Technologieposting y/y growth of 50%. SAN switching, Unified Communications (formerly Enterprise IP TelephonySecurity, and Wireless led the way. On a y/y basis, SAN switching order growth was 50%, followed bUnified Communications at ~37%, Security in the ~25% range and Wireless about 16%. The onlunderperformer was Networked Home (Linksys), which was roughly flat y/y.</p><p>Other(6% of 3Q07 Total Revenue): Other product revenue which includes access products, networmanagement software and miscellaneous parts,grew 13% q/q or 113% y/yto $546 million.</p><p>Product:3Q07product revenue increased 22% y/yto $7.5billion from $6.2 billion in 3Q06. Sequentiallyrevenue increased 5%from $7.1 billion in 2Q07.</p><p>Services(16% of 3Q07 Total Revenue): Services revenue of $1.4 billion was up 3% sequentially an19% y/y. As Cisco continues to expand its overall total addressable market opportunities (i.e. layerinmore and more intelligence into the IP-based network), the Company has also been focusing its attentio</p><p>on expanding its advanced/professional services organization.</p><p>Geographically: In terms of geographies, according to analysts, emerging markets continue to lead thway with order growth in the 40% range. Within emerging markets, Eastern Europe, the Middle EasRussia and Latin America all delivered solid order growth. Emerging markets continue to be the thirlargest theater behind the U.S. and Europe.</p><p>According to analysts, momentum in Europe continued with order growth in the low teens. Cisccommented that seven of the nine major regions in Europe delivered growth in the double digits. </p><p>Overall U.S. order growth was in the mid-teens. U.S. order growth in the service provider segment was ithe high 20% range. According to analysts, momentum in the U.S. service provider segment remain</p><p>strong based on the upgrade of networks to accommodate video. The commercial segment in the U.Sgrew 20% y/y. The enterprise business was described as mixed and delivered mid-single digit growththe same as 2Q07. Cisco did not offer too many constructive comments regarding the U.S. enterprisbusiness, only suggesting that it has stabilized.</p><p>Asia-Pacific performance was described as solid, with order growth in the 20% range. All five regions iAsia-Pacific did well with India delivering 50% year/year order growth.</p><p>Finally, Japan order growth, as expected, was down slightly based on the continued impact from thservice provider market.</p><p>Margins</p><p>Margins 3Q07AQ/Q%</p><p>ChangeY/Y%</p><p>Change 4Q07E 2005A 2006A 2007E 2008E</p><p>Gross 64.5% -0.2% -1.2% 64.5% 67.2% 66.7% 64.6% 64.7%</p><p>Operating 29.3% -0.8% -0.6% 28.8% 31.6% 30.7% 28.9% 29.5%</p><p>Pre Tax 31.8% -0.8% -0.3% 30.9% 33.9% 32.9% 31.1% 31.6%</p><p>Net 23.8% -0.8% -0.9% 23.5% 24.4% 23.5% 23.7% 24.0%</p></li><li><p>8/11/2019 Zacks Csco 08 07</p><p> 5/8Zacks Investment Research Page 5</p><p>3Q07 corporate gross margin of 64.5% (non-GAAP) was down 20 bps sequentially and 120 bps y/y duprimarily to increased Scientific-Atlanta sales and a decline in Services gross margin.</p><p>Product gross margin of 64.7% declined 10 bps sequentially based on the increased discounts and thas-expected impacts of higher Scientific Atlanta revenue, offset by volume and cost savings.</p><p>Service gross margin of 63.2% declined 120 bps sequentially due primarily to investments in headcounand advanced services making up a higher proportion of service revenue. Continued growth in advanceservices was attributed to momentum this year in service provider and emerging markets, as well as iadvanced technologies.</p><p>Headcount increased to 56,790, up from 54,563 last quarter and 48,296 a year ago. Managemenexpects to continue adding to headcount, particularly in emerging markets.</p><p>Operating expenses of $3.1 billion were up 7% sequentially and 9% y/y. Operating margin of 29.3%decreased 80 bps sequentially based on a decline in gross margin and operating expenses rising fastethan revenue.</p><p>3Q07 non-GAAP tax provision was 25%. Non-GAAP net income for 3Q07 was $2.1 billion compared t$1.8 billion in 3Q06, representing a 17% increase y/y.</p><p>Earnings per Share</p><p>3Q07 GAAP EPS was $0.30, up 37% y/yfrom $0.22 in 2Q06. Sequentially, GAAP EPS decreased 2%from $0.31 in 2Q07.</p><p>3Q07pro forma EPS was $0.34, up 16% from $0.29 in 3Q06. Sequentially, EPS increased 3% from$0.33 in 2Q07. Operating EPS excludes $0.03 of stock-based compensation expense and $0.01 ointangibles amortization.</p><p>FY Ends July 31 3Q06A 2Q07A 3Q07A 4Q07E 2005A 2006A 2007E 2008E</p><p>Zacks Consensus $0.32 $1.21 $1.43</p><p>Zacks Digest Model Max. $0.29 $0.34 $0.34 $0.36 $0.92 $1.10 $1.34 $1.60</p><p>Zacks Digest Model Min. $0.29 $0.30 $0.31 $0.31 $0.92 $0.95 $1.20 $1.34</p><p>Zacks Digest Model Avg. $0.29 $0.33 $0.34 $0.35 $0.92 $1.08 $1.31 $1.53</p><p>Company Guidance</p><p>The Companygave the following guidance for fiscal 4Q07 and FY2007. The guidance provided is on non-GAAP basis with reconciliation to GAAP and also includes the effect of Scientific Atlanta:</p><p>Management anticipates total revenue for 4Q07 to be in the range of $9.2 billion to $9.3 billionrepresenting a 15 to 16% growth y/y.</p><p>Management stated that forecasting gross margin has always been challenging based on various factorsuch as volume, product mix, variable component cost, customer and channel mix and competitivpricing pressures. According to management, total gross margin will remain at approximately 64.5%based on the continuing strength in Sc...</p></li></ul>