Cisco Systems (NASDAQ:CSCO) grew its net income 27% over the prior year to $1.6 billion. CSCO increased its revenue 26% YoY to $8.1+ billion well ahead of street estimates. CSCO generated first quarter FcF of $1.94 billion, excluding $1 billion spent on share repurchases.
Catalysts that make CSCO a buy:
- One of the reasons I really like CSCO is due to its cash horde. CSCO's finances are one of the best in the industry, with over $16 billion in cash, no long-term debt, and cash flow generation that averages more than $600 million per month.
- Another reason to be bullish on CSCO is that CSCO dominates the overall routing market, with a more than 50% share. For core routers, which have speeds of more than 2.5 gigabits per second, CSCO and Juniper Networks dominate the market, with a combined market share of over 95%.
- CSCO's US orders grew in the upper-teens and European orders grew in the low double-digits as commercial orders improved 20%, enterprise orders were up in the mid-teens, and telecommunications carrier orders increased 23%. Scientific Atlanta orders increased 20%.
- The company increased its routing revenue 13%, driven by robust demand for its high-end CRS 1 router, its switching revenue 15%, and advanced technologies 23%, enterprise VOIP systems and wireless network contributed to most of the increase in this segment.
- In my view, CSCO is maintaining its dominant market position in the large network routing and switching markets, while successfully positioning itself in attractive subsegments.
- With a dominant market share of approximately 70% of the overall Ethernet switching market, CSCO is the goto facto choice for Ethernet switches. I view CSCO large installed base as a significant competitive advantage over peers, especially in cases of modular switching solutions, where it is very difficult for competitors to displace the large modular chassis equipment.
- Due to its reputation and related large market share Cisco products typically enjoy a price premium over the competition.
- Higher revenue did not provide upside to earnings, since Cisco’s gross margin declined 250 basis points YoY and 50 basis points on a sequential basis to 64.8% and the firm’s operating income margin fell 270 basis points YoY and 150 basis points sequentially to 28.8%.
- In fiscal 2007, Cisco will spend $4 billion on share repurchases to offset potential dilution associated with stock options. CSCO’s estimated 07 adjusted FcFis $3.8 billion, with a FcF of only 2%, substantially below the S&P 500 and other leading technology companies.
- Investors should also look for the gross margin to narrow modestly, to about 65%, in FY 07, primarily attributable to a less favorable sales mix reflecting strong advanced technology growth, as well as the addition of Scientific Atlanta products.
- Other factors affecting profitability include component costs, channel mix, and competitive pricing pressures.