CSCO Q3 earnings analysis 8-May-07 BMO
consensus: EPS 0.33/0.31 / Yr Ago 0.25 / Rev 8765.07
Gapping Analysis
| Q2 | 06 Feb 07 AMC | - beat $0.02 | _____ | + 1.35 – 0.55 |
| Q1 | 08 Nov 06 AMC | - beat $0.02 | _____ | + 2.35 – 0.75 |
| Q4 | 08 Aug 06 AMC | - beat $0.02 | _____ | + 2.10 + 0.35 |
| Q3 | 09 May 06 AMC | – beat $0.03 | _____ | + 0.30 – 0.60 |
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Risk/ Reward Analysis
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CALL |
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| Jun 27.5 $1.40 [ITM] Jun 30.0 $0.40 [nearest OTM] Jun 32.5 $0.15 [next OTM]Diff ٪ 27.80 Stock Price & 30 Call = $2.20$1.00 premium diff (1.40-0.40) $2.20 stock price = $0.45 premium movement per dollar of stock movementassuming $2 stock movement Jun 30 Call = (0.45 x 2) -0.40 / 0.40 => 125% |
Jul 27.5 $1.70 [ITM] Diff ٪ 27.80 Stock Price & 30 Call = $2.20 $1.05 premium diff (1.70-0.65) assuming $2 stock movement |
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Info
06 May 07 SeekingAlpha: A major supplier, Altera, (ALTR) looked weak. That makes us nervous.
03 May 07 Marketwatch: Cisco seen reporting surge in sales, profit
CSCO expected to report surge in sales and profit when it reports Q3, spurred by stronger dd for its networking gear among corporate custs and ISPs.
Sales are seen rising 20% to $8.76B from $7.32B a yr earlier.
- The just-ended qtr is the last period in which CSCO’s YoY comparisons were helped by its $6.9B acquisition of Scientific-Atlanta, whose equipmt allows cable operators to offer hi-speed Internet svc.
- On last conf call, CEO forecast YoY sales growth of 19-20% (incl Scientific-Atlanta sales), or 15-17% (excl that rev).
- Stock price has jumped 30% during past 12 mths & risen by more than half – adding more than $80B mkt value — since last Augt, when CEO raised the co’s full-yr sales growth forecast due partly to better-than-expected dd for Scientific-Atlanta equipmt.
08 May 07 Briefing: Macrovision license agreement with Scientific Atlanta
Scientific Atlanta will integrate Macrovision’s digital home media solution into several Scientific Atlanta platforms, incl cable/IP set-top boxes, cable modems, residential gateways and WiMax modems.
07 May 07 Briefing: RBC sees strengthening trends for networking spend as qtr progressed
07 May 07 Briefing: market share gains made by Cisco
03 May 07 BofA expects another solid qtr with healthy guidance for July
Checks have been +ve and results from CSCO’s smaller peers have been in-line to abv expectations.
US enterprise biz improved during the Apr qtr, while Scientific Atlanta and the emerging mkts were also strong.
02 May 07 Goldman Sachs: Buy ahead of the qtr
high likelihood of beating ests of $8.8B in revs and EPS of $0.33 (incl Scientific Atlanta acquisition, but ex-ESO) for 3Q07.
believes pdt orders should grow double digits YoY, producing a book-to-bill above 1.
For 4Q07, expects guidance to suggest upside to consensus, calling for sequential sales growth of 5-6% and EPS (ex- ESO) of $0.35-$0.37. They believe that mgmt will put concerns around slower US large-cap tech spending to rest.
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Trade
BTO 3 x Jun 30 Call @ 0.50 [stock price $28, 1.16pm]
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Result
Reports Q3 (Apr) earnings
EPS $0.34, excl items, $0.01 better than ests of $0.33;
Revs rose 21.1% YoY to $8.87B vs $8.77B consensus.
net income $1.9B, EPS $0.30 vs $1.4B, or $0.22 a share, a yr earlier.
reafirms L/T rev guidance of 10-15% range
guidance
Q4 rev growth 15-16% which is $9.18-9.26B vs $9.22B consensus
gross margins 64.5%
Conf Call Summary
Believe they are gaining mkt share vs almost all their competitors in the svc space. Intend to dramatically differentiate CSCO in cust satisfaction & svc. Scientific Atlanta abv high end of their expectations at 30% growth. Co saying “key takeaway is that momentum remained v strong in Q3. Collaboration enabled by Web 2.0 will be 2nd phase of the internet. Co v optimistic abt their chance to monetize this change and see it as major inflection point. Seeing v +ve early results fr their globalization strategy. Tone +ve and mgmt seems v optimistic abt new “internet revolution” that is coming with Web 2.0.
Color on quarter
CIBC CSCO’s results v encouraging for Comm IC sector as they speak to a still strong end-dd environmt for IT and carrier equipmt despite weaker trends at component level. The broad-based nature of CSCO’s strength pts to a healthy investment cycle by both enterprises & svc providers…
Stifel Within US, CSCO saw strength in the commercial and svc provider segments. Overall, saw strength in all geographies except Japan. Firm notes order growth for the entire co was in the midteens, despite weakness in US enterprise mkt.
09 May 07 SeekingAlpha: Cisco Gives Market a Reality Check
CSCO’s Q4 revenue outlook to 15-16% growth from the 20% rise seen in April (Q3).
Analysts had been expecting a full 16% rise in revenue for Q4.
This is another reality check for those who think the US economy is running on all cylinders. From CSCO’s perspective its largest US custs are “relatively sluggish”. That’s not to say we’re about to enter the Great Depression tomorrow, but the outcome of this CSCO report shows that investor giddiness and what’s really going on were, at least with CSCO, quite out of sync.
09 May 07 Forbes: Cisco Systems Slides, sales forecast below estimates
While Q3 sales beat ests, Q4′s sales outlook of $9.2 – 9.3B slightly lower than ests.
continuing struggle in Cisco’s US enterprise segment, which sells routers to businesses.
Stifel Nicolaus: businesses pulling back equipmt spending, expects to continue thru Q4.
09 May 07 Briefing: AmTech notes solid Apr qtr; buyers on weakness
solid Apr qtr results of $8.87B rev and $0.34 EPS vs consensus ests of $8.76B and $0.33. As firm forecasted in their preview, investors would likely hv a better entry level to buy CSCO following the report. This is the pullback they have been looking for to become more aggressive on CSCO, encourages investors to buy today on weakness.
09 May 07 Marketwatch: Cisco stock falls despite higher profit – Concerns about revenue growth cited
future rev growth overshadowed a 34% gain in Q3 profit
disappointment that CSCO did not raise its Q4 sales forecast
Another worry: gross margin fell slightly.
Scientific-Atlanta helps results – Sales in Scientific-Atlanta jumped 85% to $752M from $407M a yr earlier. The increase was closer to 30% adjusted to conform with the non-calendar basis on which CSCO reports qtrly results. About 10% of Cisco’s sales now derive fr Scientific-Atlanta.
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