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Stock Analyst Update

Order Weakness Continues in Cisco's Q1

We are maintaining our fair value estimate and view shares as slightly undervalued.


Narrow-moat Cisco's (CSCO) 1% year-over-year sales growth (2% growth excluding divested SPVSS) was slightly better than Cap IQ consensus estimates. The transition to software, robust security growth, and application sales helped buoy weakness in routing products. Order weakness seen at the end of fiscal 2019 continued through the first fiscal quarter, and Cisco expects spending uncertainties to persist. Service provider business in emerging markets continues to be the most problematic area; additionally, Cisco saw weakness in its enterprise and commercial segments in the quarter. Although we expect Cisco to be affected by spending uncertainties in the near-term, we believe its strategic shift toward selling more software and services make the company a sustainable part of the networking and security aspects of hybrid-cloud environments. We are maintaining our fair value estimate of $48 per share. Shares dropped about 5% after Cisco reported, and we view shares as slightly undervalued.

Compared with the prior year, infrastructure platforms decreased by 1%, applications grew by 6%, security expanded by 22%, and services grew by 3%. In infrastructure platforms, switching saw growth in campus and data center markets, wireless strength was driven by the Meraki portfolio, and the data center segment growth was attributed to hyperconverged infrastructure. However, routing weakness in the service provider market pulled the infrastructure platform segment down. The strength seen in the security group was fueled by identity and access security, advanced threat protection, and web security. The applications business had broad-based strength, and AppDynamics experienced double-digit growth. Service sales growth was driven by software and solutions support. Software subscriptions were 71% of total software revenue, an increase of 12% compared with the prior year. Cisco is on track to meet its goal of having 50% of total sales from software and services by the end of fiscal 2020.

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