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Stock Analyst Update

Solid Results, Aggressive Buyback Plan for Cisco

We're raising our fair value estimate on the narrow-moat firm.

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 Cisco (CSCO) reported strong fiscal second-quarter results and provided investors with a relatively bright third-quarter forecast, thanks to healthy demand from data center customers. Additionally, Cisco is ready to pounce on recent changes to U.S. tax law, with plans to repatriate $67 billion of cash into the U.S., boosting its dividend 14% and announcing a whopping $25 billion of additional authorization to its share buyback authorization. We will raise our fair value estimate for narrow-moat Cisco to $40 per share, but with shares up about 6% after hours, we still view shares as modestly overvalued today.

Cisco’s revenue in the January quarter was $11.9 billion, down 2% sequentially but up 3% year over year and toward the high end of the firm’s previously forecast range of 1%-3% year-over-year growth. Infrastructure platforms were up 2% year over year, thanks to robust demand for the firm’s Catalyst 9000 switches, particularly in data centers, where revenue was up double digits. Applications and security revenue each rose 6% year over year, while service revenue rose 3% year over year. Adjusted gross margins of 64.7% was well above the firm’s previously forecast range, as product gross margins rose 90 basis points sequentially to 63%.

For the April quarter, Cisco expects revenue to rise 3%-5% year over year, which, at the midpoint, would also represent 4% sequential growth. The firm is also calling for decent adjusted EPS growth to the range of $0.64-$0.66. Overall, the firm continues to see nice demand from data center and campus customers. Service provider demand remains sluggish (revenue down 5% in the quarter), although the company continues to focus on web scale customers, with the firm’s partnership with Google Cloud as one high-profile example. Meanwhile, Cisco continues to shift toward a more stable, subscription revenue model, as 33% of revenue is now recurring, up 2 points year over year.

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Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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