We Continue to Avoid Cisco Until Data Improves

EVENT CSCO Scheduled To Report FQ2 Revs, FQ3 Guidance Today (2.4.09)
CAUSE Supply Chain Analysis Suggests Guidance Well Below Street Est Of $8.749B
IMPACT Negative For CSCO + Supply Chain
ACTION Continue To Avoid CSCO + Supply Chain

click to enlarge

SUPPLY CHAIN EVENT TRACKER

12.19.08 Supplier JBL gudes FQ2 revs -5.4% below Street expectations
1.6.09 Competitor FFIV guides Q1 revs -3.7% below Street expectations
1.14.09 Supplier XLNX gudies FQ4 revs -10.5% below Street expectations
1.21.09 Competitor NTGR guides Q1 revs +0.2% above Street expectations
1.22.09 Supplier MRVL guides FQ4 revs -27.2% below Street expectations
1.28.09 Supplier CLS guides Q1 revs -8.7% below Street expectations
1.28.09 Supplier CAVM guides Q1 revs -10.5% below Street expectations
1.28.09 Supplier LSI guides Q1 revs -7.5% below Street expectations
1.28.09 Supplier FLEX guides FQ4 revs -16.3% below Street expectations
1.29.09 Supplier IDTI guides FQ4 revs -19.2% below Street expectations
1.29.09 Competitor JNPR guides Q1 revs -7.8% below Street expectations
1.29.09 Supplier AMCC guides FQ4 revs -17.1% below Street expectations
1.29.09 Supplier BRCM guides Q1 revs -12.1% below Street expectations

EVENT: EXPECT FQ3 REVS BELOW STREET. CSCO is scheduled to report FQ2 (Jan) revs and FQ3 guidance today (2.4.09) after the close. The Street currently expects FQ2 revs of $8.998B (-8.5% Y/Y, in line with management’s guidance of down -5-10% Y/Y), with FQ3 revs at $8.750B (-2.8% Q/Q vs 7-year avg +3.0%, σ=4.09).

CAUSE: NEGATIVE SUPPLY CHAIN DATA. Commentary from virtually every semiconductor, EMS, or comm equipment supplier has indicated continuing deterioration in business fundamentals. As the table below shows, the avg Q/Q rev decline for the Mar Q for companies in CSCO’s supply chain is -15.8%)—yet the Street is assuming just a small Q/Q rev decline at CSCO (-2.8%), modestly below seasonality (+3.0% Q/Q).

Based on these supply chain data, we believe CSCO could guide FQ3 revs to a decline of -15-20% Y/Y or more, the mid-point of which would translate to $8.078B (a Q/Q decline -10.2%, assuming CSCO reports FQ2 revs in line with the Street). Given that this Q/Q decline is still better than the vast majority of its suppliers, additional downside is certainly plausible.

IMPACT/ACTION: CONTINUE TO AVOID CSCO + SUPPLY CHAIN. We have noticed that guidance for upstream semiconductor and EMS suppliers is significantly out of step not just relative to CSCO, but also other large OEMs like HPQ and DELL. Whereas suppliers are forecasting double-digit Q/Q rev declines, the Street is assuming Q/Q rev declines in the low single digits for these OEMs. We would continue to avoid CSCO and its supply chain until we see any improvement in the data. For more information, see our BizMaps at www.connexiti.com.