We’re maintaining our $28 per share fair value estimate despite weaker-than-expected revenue guidance.
By Ilya Kundozerov | 05-18-17 | 06:18 AM | Email Article

 Cisco’s uninspiring third-quarter top-line performance was expected. However, the company delivered a better-than-expected operating margin due to solid expense control efforts.

Ilya Kundozerov is an equity analyst for Morningstar.

The big news was much weaker revenue guidance, with the top line expected to decline 4%-6% next quarter, with potential spillover to fiscal first-quarter 2018. Cisco cited a soft services provider business, challenges in its U.S. federal business, and macro-related headwinds in certain international markets. The company also announced additional restructuring efforts that will affect 1,100 employees and result in $150 million of estimated pretax charges.

We maintain our view that Cisco is rightly focused on transitioning its business to software. We think investors were overly excited about Cisco future prospects in recent months, and with a 7.5% pullback in stock price in afterhours action, shares are returning to our 3-star range, close to our unchanged fair value estimate for this narrow-moat name.

Total revenue came in at $11.9 billion, down 0.5% and on the lower side of management’s guidance. Surprisingly, Ethernet switching revenue posted 2% growth due to strength in the data center, but we don’t expect this trend to continue. The NGN routing segment is expected to decline as well due to ongoing weakness in service provider spending. The strength of wireless and security segments was expected (up 13% and 9%, respectively, year over year), as was weakness in the data center, which declined 5%, as Cisco was late to the market with its HyperFlex hyperconverged offering. Collaboration segment declined 4% due to lower sales of unified communication products, partially offset by WebEx. We think Cisco’s Spark product portfolio may also help to turn the tide in this segment.

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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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