How Have Cisco’s Prospects Changed Post-Q3 Results?

by Trefis Team
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Cisco (NASDAQ:CSCO) reported its Q1 results on Wednesday post-market, beating consensus expectations for revenue and EPS. The company’s growth continued to be broad-based with 9% y-o-y growth in product revenue. As we noted earlier, Cisco has been building business momentum on the back of demand, and also continues to benefit as revenues increasingly become software-oriented.

We are maintaining our price estimate of $54 per share for Cisco, which is around 10% higher than the current market price. Our interactive dashboard on Cisco’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation.

Cisco’s Q1 results carried the strength seen last quarter. What was interesting to note was the relative momentum that Cisco seems to be building across segments.

  • Total revenue growth (y-o-y): 8% in Q1 2019 vs 6% in Q4 2018 vs guidance of 5-7% y-o-y growth for Q1 2019
  • Infrastructure Platforms revenue growth (y-o-y) of 9% in Q1 2019 vs 7% in Q4 2018 was driven by growth in switching on the back of increasing data consumption. Switching growth in campus was attributed to Cat9K and to Nexus 9K in data centers. Even the routing business, which was down last quarter, was up this time around.
  • Applications revenue growth (y-o-y) of 18% in Q1 2019 vs 10% in Q4 2018 was driven by growing strength in Unified Communications, TelePresence and AppDynamics. Cisco claims that over 95% of the Fortune 500 use the company’s collaboration solutions
  • Security revenue growth (y-o-y) of 11% in Q1 2019 was 1% lower than the 12% in Q4 2018. However, the company saw growth across Identity & Access, Advanced Threat and Unified Threat.
  • Service revenue growth was flat y-o-y at 3%.

While the management does not believe that there have been any major issues owing to the U.S.-China trade disputes, product deferred revenue was down 24%. However,  management attributed this primarily to a higher portion of revenues becoming software-based and the impact from the adoption of ASC 606. ASC 606 requires upfront recognition if the customer receives software functionality.

We believe the company’s guided revenue growth range of 5-7% for Q2 may again turn out to be conservative, given the broader growth in multi-cloud environments and higher portion of Cisco’s revenues becoming software-based.

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