Is Cisco Running Out Of Levers To Pull To Boost Revenues?

Credit Suisse reaffirmed its Underperform rating on Cisco Systems, Inc. (NASDAQ: CSCO), saying its long-term concerns remain that the company is increasingly challenged by SDN and continues to lose share in the 10GbE & above switching market.

For its second quarter, Cisco delivered a EPS beat. Cisco’s third quarter revenue guidance was $11.9 billion, guided to -1 percent year-over-year, excluding the STB business, with EPS of $0.57-$0.59, in-line with consensus estimate of $0.58.

Analyst Kulbinder Garcha noted Cisco continues to struggle to sustainably grow its switching business, with switching revenues declining 4.9 percent in the quarter.

“Our concern is that the switching business faces increasing pressures, as Cisco continues to lose market share in the datacenter switching segment,” Garcha wrote in a note.

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The analyst’s bearish thesis on the stock is also centered on concerns that Cisco may be running out growth levers that have offset declines in switching business, resulting in gross margin pressures.

In its second quarter, the company saw revenue drop in four out of nine divisions, with previously strong growth areas such as Datacenter again in decline.

The analyst pointed out further gross margin leverage is unlikely with the company noting slightly heightened pricing and reporting product gross margin of 62.4 percent, which is close to record highs.

However, Garcha raised his target price by $2 to $27 despite seeing limited upside for the shares.