Cisco Results Come in Better Than Expected

Cisco reported better-than-expected fiscal third-quarter results with revenue coming in roughly $186 million ahead of the Street target, representing a 5% year-over-year decline, and non-GAAP EPS coming in $0.03 higher than the consensus estimate. Guidance for the fourth quarter was also ahead of the Street with revenue expected to decline by 3% to 1% year-over-year (roughly $372 million ahead of the Street at the midpoint) and non-GAAP EPS expected to come in a penny ahead of the consensus estimate. The company’s better-than-expected forecast was fueled by a strong backlog exiting the quarter with a book-to-bill ratio comfortably above 1.0 and flat year-over-year product order growth, following two consecutive quarters of order declines.

During the quarter, the company experienced strength in the U.S. commercial and enterprise segments that both saw orders increase by 10% year-over-year. At the same time, emerging markets continued to be challenging (orders down 7% year-over-year) and the service provider vertical remained challenging with orders down 5% year-overyear; although order declines moderated from a 12% year-over-year decline in the prior quarter. The company executed well during the quarter, albeit relative to significantly curtailed growth expectations, and we believe that

Cisco is now on a trajectory to return to marginal year-over-year top-line growth by the first fiscal quarter of 2015, a quarter sooner than we anticipated. This together with tame Street expectations, attractive valuation level, and Cisco’s market power and installed base continue to tilt the risk/reward equation toward the positive, in our view. At the same time, we believe that Cisco is sustaining attacks from best-of-breed vendors across almost its entire product portfolio, including switching, routing, wireless, security and collaboration. New product introductions, as well as strong execution, will be necessary to fend off these attacks going forward.

During the quarter, the company made progress in building its order backlog and demonstrated progress in managing through its major product transitions. High-end routing returned to year-over-year order growth, reversing a three-quarter negative trend, the company saw good traction with its ACI-enabled Nexus 9000 (175 new customers relative to 25 in the prior quarter with the pipeline approaching 1,000 customers), and security orders grew 20% year-over-year. Similarly, while collaboration revenues decreased 12% in the quarter, orders increased 4% year-over-year, reversing a multi-quarter negative trend thanks to software-as-a-service WebEx momentum.

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