The narrow-moat company reported a disappointing start to its fiscal year.
By Ilya Kundozerov | 11-16-16 | 09:25 PM | Email Article

 Cisco  reported a disappointing start to its fiscal year due to a 12% decline in the company’s service provider segment. The overall weak top line performance was visible across most of categories except routing and security. Cisco’s management issued soft guidance for the next quarter as service provider segment weakness is expected to persist in the next quarter. Our narrow economic moat rating and fair value estimate of $27 are unchanged. Despite a modest 4% pullback in after-market action, the stock remains overvalued and we would seek a wider margin of safety before investing.

Ilya Kundozerov is an equity analyst for Morningstar.

Total normalized revenue for the quarter was $12.4 billion, up 1% year over year. Ethernet switching revenue was down 7.6% year over year and 2.1% sequentially as enterprises continue to hold back on campus network upgrades. Despite 33% growth in ACI products, we remain concerned that Cisco’s bread-and-butter switching segment, especially the network campus part will come under an increasing pressure from low-cost competitors, and we continue to model a long-term decline. The company’s routing segment performed better this quarter (up 16.5% year over year), but we expect declines in the next quarter as carriers invest in other parts of the network. We are not surprised with 2.9% yearly revenue decline in the company’s Datacenter segment, as enterprises continue to shift workloads to cloud and new on premise architectures (hyperconverged). While the security segment performed relatively in line with our expectations (up 11.3% year over year and flat sequentially), we are disappointed with Cisco’s wireless segment, which declined 2% year over year and 16% sequentially. The company cited slower-than-expected E-Rate program ramp up and market shift to cloud-based wireless controllers.

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Ilya Kundozerov does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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