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Can Cisco Systems Post Another Upside Surprise In Q2?

 February 06, 2013 10:38 AM

(By Mani) Cisco Systems, Inc.(NASDAQ: CSCO) is expected to announce second-quarter financial results on Feb.13, and could report  in-line earnings with potential for upside surprise as improved demand in the U.S. could offset weakness in Europe.

Wall Street, on average, expect the networking gear maker to earn 48 cents a share on revenue of $12.06 billion, according to analysts polled by Thomson Reuters. In the same quarter last year, Cisco earned 47 cents a share on revenue of $11.53 billion.

San Jose, California-based Cisco, a Dow component is one of the world's leading manufacturers of computer networking equipment. The company is viewed as a technology-industry bellwether due to its far global reach and sensitivity to business and government spending cycles.

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For the past four quarters, Cisco's earnings have topped Street view. This is a good sign that the company is holding its own despite tough macro environment curtailing IT spending. In the past 30 days, one analyst has raised earnings view for Cisco.

In November, Cisco said it is seeing signs of improvement in the U.S. in both the enterprise, service provider and commercial.

For the second quarter, Cisco expects non-GAAP earnings to range between 47 and 48 cents a share on revenue growth of 3.5 to 5.5 percent. Non-GAAP gross margins are projected to be approximately in the range of 61 to 62 percent, and operating margin is estimated at 26.5 to 27.5 percent.

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Cisco's core routing/switching business is holding against a challenging macro and Unified Computing System (UCS) momentum is still gaining on traditional sever vendors. UCS is a solid example of Cisco's integrated approach to the data center by addressing servers, storage and networking.

"Based on channel checks in the US/Europe (~70% of Cisco's sales), we see upside to Cisco's January quarter and a solid pipeline building into FY3Q13. Roughly 40% of our contacts expect a sequential increase in revenue with just 6% expecting a decline," Oppenheimer analyst Ittai Kidron wrote in a note to clients.

The announced divestiture of Linksys (home routers) brings a more focused portfolio while the investors would be focusing on the weakest link -- Cisco's Video/TelePresence line.

Cisco will continue its focus on improving margins, which could be achieved by acquiring software companies. During the November to January period, Cisco bought six companies, including cloud networking firm Meraki for $1.2 billion and Caridien Technologies for $141 million.

Investors would be eyeing Cisco's outlook for the third quarter, which looks more promising with Wall Street estimated revenue growth of 5.4 percent. Street expects earnings of 49 cents a share on revenue of $12.22 billion.

For the first quarter ended Oct. 27, 2012, Cisco reported net income of $2.1 billion or 39 cents a share, compared to $1.8 billion or 33 cents a share for the year-ago quarter. Excluding items, adjusted net income was $2.6 billion or 48 cents a share. Cisco's net sales for the first quarter rose 5.5 percent to $11.88 billion.

Cisco's P/E ratio is 10.7 times is less than peer Juniper Networks, Inc. (NYSE: JNPR), which has a P/E of 19 times. The stock has gained 31 percent since its last quarterly earnings release in November.

Of 43 analysts covering the stock, 28 rate CSCO a "buy or strong buy" while eleven of them rate it "neutral." Four analysts have a "sell" rating on the stock.



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