Tuesday, February 08, 2005

Cisco surprises -- not exactly as I expected

CSCO results were not as I expected for the most part. Revenues and EPS barely came in at midpoint of guidance instead, of my expectations for higher-end results. Book-to-bill was below 1 even though orders grew faster than revenues. October book was pretty bad and switches were weaker than I had first thought, which continued into January quarter. My guess on book-to-bill being better than 1 was wrong since, October was worse than I had thought. Product push in late December and services push in late January was not enough. Inventories were slightly up with company ramping up for the usual surge in July quarter.

Where was I right? Services saw very nice push in revenues and defered revenues. The ramp in cost associated with that was bit more than I expected hurting gross margins. Opex increased due to hiring of 1,000 new employees; this should continue but at a slower pace. As I had stated, Advanced Technologies did have a very strong quarter with revenues up 40% Y/Y driven by Optical, Storage and IP Telephony. Even with lower than expected April guidance, the company still expects revenues to grow 10%-15% in FY05, which means July has the potential of growing 8% sequentially- clearly a huge quarter but as I said all this means the street numbers will not change much for now. But if you believe CSCO can do 8% q/q growth in July then its time to buy CSCO, and I certainly beleive CSCO sticks to its guidance and will have a strong July quarter.

Other important things on the call included the discussion about Federal government not spending on infrastructure but on tanks and bullets. CSCO does not expect government to come back for another two quarters. This could be a negative for FDRY which drives close to 25% of its revenues from government. Also, management noted that Japan, France and Germany are all having economical issues which is not helping sales. This does not bode well for all technology vendors since these three are some of the biggest economies in the world.

CSCO's new ISR Access router had a stellar quarter and has hit a$1B run-rate something many of the Advance Technologies categories are far from. Also interestingly ISR is being shipped 40% of time with security features. This is good trend for integration of various functions into one box (plus protects gross margins) in general but could be negative for JNPR with its NetScreen products and push into integrated boxes also this could open up the new J-Series to serious competition. It could also be negative for CHKP and WGRD. On the other hand CRS-1 is doing ok gaining new customers but nothing was said on how its doing with generating revenues like JNPR is with its core routers. Other than that it was another one of those CSCO quarters :)


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