Monday, February 07, 2005

Can Cisco surprise?

CSCO is going to release its fiscal second quarter earnings tomorrow (2/8). The consensus expectations are for revenues of $6.13B and EPS of $0.22. CSCO has guided to 1%-3% revenue growth and gross margin between 67%-68%. Areas of strong interest during tomorrow's call will be revenues/eps, gross margins, operating expenses, shares outstanding/buy-back, inventory, book-to-bill, guidance for April (which is a seasonally soft quarter- the weakest quarter) any indication of what might be the next area in Advanced Technologies that CSCO might expand into. There are few major-sell-side shops that expect results to be towards lower-end of the management expectations and some characterize the quarter as "difficult". I believe CSCO results might not be that bad.

This is what I expect: I think CSCO has the potential to surprise the street not only for FQ1 but also in the April guidance. I believe closer to 3% growth is possible for January. Street expects April guidance of 1.6% sequential growth, I believe 2.5% at the high-end is possible for April guidance. Book-to-bill could be better than 1 (whereas most expect this to be below 1 or close to 1), inventories should decrease slightly, opex will be up due to continued hiring, gross margin could be flat to slightly up, Services should have a stellar quarter. Advance Technologies had a good quarter as well driven by optical, Linksys and IP Telephony.

All in all it should be a decent quarter with a possibility of a positive surprise. But I do not think street estimates for the year will move up substantially. But given that CSCO stock has been weak lately and is at a fairly decent valuation I think stock could move higher. But with CSCO being such a large part of Nasdaq it's very tough getting the direction of CSCO stock right- its like calling the market direction.

Full Disclosure: I am long CSCO


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