Cisco: FYQ2 Trends Were Favorable, Says Credit-Suisse

Credit Suisse’s Paul Silverstein today reiterated an Outperform rating on Cisco Systems (CSCO) shares in advance of the company’s fiscal Q2 report tomorrow evening for the three months that ended in January.

The Street is looking for $11.22 billion in revenue and 43 cents a share in profit tomorrow. Silverstein is looking for $11.34 billion and 45 cents.

Cisco probably had a better time last quarter than did peers, writes Silverstein:

Our industry checks and public datapoints suggest that enterprise IT spend (two-thirds of revenue) has held up surprisingly well. While JNPR and a number of other suppliers recently cited weak North�?????????????America Tier 1 carriers for challenging outlook, we believe CSCO has significantly less leverage to Tier 1 U.S. carriers and in ASR5000 and ASR9000 has relatively stronger product cycles at present to help cushion any blow.

The longer-term perspective, he writes, is that margins “appear to have stabilized,” for both gross and operating profit.

The “frankly surprising” rebound in Cisco’s enterprise routing switching business lends hope to the gross profit outlook:

While far off the 68% overall and product gross margin peak levels established in the second quarter of fiscal 2006, overall pro forma gross margin (excluding employee stock compensation expense) exceeded 62%–with product gross margin remaining above 61%�for a fourth consecutive quarter providing hope and a basis for belief that gross margins will not fall off the proverbial cliff, but rather could�and likely will�stabilize in the 60 � 63% range over the next 12 � 24 months.

As far as the growth outlook, the largest risk is overall microeconomic weakness. Again, Silverstein sees signs of hope in the company’s recent book-to-bill trends:

Cisco has posted a positive book-to-bill together with solid 10 � 20% year-over-year growth in deferred revenue in each of the past four quarters. While not having established a clear trend, Cisco generated solid 10+% year-over-year order growth both in all of its geographic regions and in all of its customer markets, which also bodes well for Cisco�s�?????????????future growth. We note that each of its major geographic regions has now posted two straight quarters of almost 10 to greater than 10% year-over-year order growth. Similarly, Cisco�s service provider, non-public sector nterprise and commercial/SMB customer markets each has posted 10+% year-over-year order growth over each of the past two quarters.

Silverstein has a $26 price target on Cisco shares.

Cisco shares today are up 4 cents at $20.23.