Cisco’s Worth $21 as Margins Hold Up Despite Choppy Markets

CSCO: Cisco logo

Cisco (NASDAQ:CSCO) reported strong first quarter earnings with both revenue growth and adjusted earnings per share (EPS) beating market estimates. It seems like Cisco is finally able to bring about the desired operational efficiency as a benefit of its months long overhaul to save $1 billion through layoffs and asset sales are now beginning to show up in its results. Earlier this year, Cisco witnessed its shares drop amid sluggish demand and increased competition from players like Juniper Networks (NYSE:JNPR), Alcatel-Lucent (NYSE:ALU) and Hewlett-Packard (NYSE:HPQ) among others.

We currently have a $21.21 Trefis price estimate for Cisco, about 15% above the market estimates.

See our full analysis of Cisco

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Cisco Manages to Grow Revenue amid Difficult Market Conditions

Cisco made solid progress in Q1 2012 generating revenues of $11.3 billion, up 5% year-over-year, better than the company’s expectations of 1%-4% growth. Cisco’s services revenues were up 12% to $2.3 billion and product revenues increased 3% to $9 billion. The better-than-expected revenue growth is more striking taking into account the difficult market conditions that Cisco is operating in currently. We pointed out in our earnings preview that Cisco’s top line may suffer from continued lower government spending in both the U.S. and Europe. (See Cisco Q1 Preview: What We’re Watching Wednesday)

Cisco expects revenue growth to be in the 7%-8% range for Q2 2012 on a year-on-year basis.

Margin Improvement Remains Key

Management pointed out in the earnings call that gross margin improvement is the key focus for the company and while gross margins were down 0.3 percentage points quarter-over-quarter and down 1.9 percentage points year-over-year, it was better than expected.

More importantly, Cisco was able to achieve cost savings during the quarter, including positive impacts from value engineering efforts in key product areas such as switching and higher volume, partially offset by discounts and rebates.

Cisco also announced that beginning Q1 it has started realizing the benefits of restructuring and organizational changes in the form of cost reductions, productivity, business transformation or revenue growth. This indeed bodes well for the company’s outlook.

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