Friday, November 7, 2008

CSCO F1Q09 Earnings 11/05/2008 - (Daren Pon)

Cisco’s Q1 revenue was up 8% year over year at $10.3 billion from $9.55 billion a year ago and net income was $2.2 billion or 37 cents a share, up 2 cents from last year. Non-GAAP EPS was up 5% to $0.42, 3 cents above the street expectation. Additionally, gross margins increased to 65.6% from last quarter’s 64.9%. Enterprise year over year order growth across all of Cisco was down 11%, while the service provider, commercial and public sector were approximately flat from the year over year orders. Assuming that the global economy recovers to normal growth rates, CEO John Chambers maintains the long-term growth rate of 12-17%. Cisco forecasts Q2 estimates of 5-10% decrease in revenues from a year ago, gross margins of 64%, and capital expenditure of 39-41%. Cisco may seek to make key acquisitions during the economic downturn to increase future profitability.

Cisco still maintains a position of product leadership and has made great progress as an enabler of Web 2.0. Momentum could be realized from their strength in emerging markets and Japan; however, the great deal of Cisco’s profitability is tied into the overall resurrection of the global economy and in turn basic Information Technology spending. I suggest a hold on Cisco to wait for more favorable long-term conditions to arise, but would offer it as the first name to be slashed within the portfolio’s technology allocation to make room for more immediately profitable equity selections and to solidify diversification.

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