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Stock Analyst Update

Global Spending Weakness Hampers Cisco's Q4; FVE Stands

Narrow-moat Cisco Systems' 10% year-over-year revenue decline in the fourth quarter was slightly ahead of CapIQ consensus estimates, and the company performed well on the bottom line.


Narrow-moat Cisco Systems' (CSCO) 10% year-over-year revenue decline in the fourth quarter was slightly ahead of CapIQ consensus estimates, and the company performed well on the bottom line. However, management's guidance for the September quarter was weaker than we expected as Cisco does not currently see much spending improvement from a quarter ago. Although Cisco commented that its largest enterprise customers were a pocket of strength in the quarter, broad-based spending weakness by small to medium businesses impacted overall performance. Cisco is taking the demand lull as an opportunity to right size, with a plan to remove over $1 billion in costs, and realign development resources into higher growth strategic areas. While we expect demand weakness to continue impacting Cisco in the near term, the company's product portfolio strategy, solid operating profile, and balance sheet give us confidence in the longer term. We are maintaining our $48 fair value estimate and view shares as fairly valued.

Infrastructure platforms was greatly affected by the pandemic spending environment and declined by 16% year over year. Switching, routing, data center, and wireless all declined, driven by commercial and smaller enterprise spending weakness. The Catalyst 9k had strength as some customers are upgrading their campus equipment while employees are remote, and Wi-Fi 6 products are starting to ramp. Applications decreased by 9% compared with the prior year, as the strength in WebEx and AppDynamics could not make up for headwinds seen in unified communication and telepresence endpoints. Security grew by 10% year over year with demand for network, identity and access, and cloud security performing well. Services was flat year over year as growth in maintenance was offset by declines in advisory services. Cisco continues to push toward more recurring revenue, and subscriptions now represent 78% of software revenue (up from 70% a year prior).

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