Cisco's near-term trends remain solid

27 March 2006

Recent acquisition of Scientific Atlanta to contribute $350m during the quarter

RBC Capital Markets maintained an "outperform" rating and $23 price target on Cisco Systems ahead of the company's fiscal third-quarter earnings report.

"Overall trends remain solid" and "should enable Cisco to see continued earnings growth," wrote analyst Mark Sue in a research note, "but we are not expecting a blow out near term."

Sue sees near-term trends at Cisco tracking towards his $7.15 billion estimate, which assumes third-quarter sequential organic growth of 3%. He expects the company's recent acquisition of Scientific Atlanta to contribute $350 million during the quarter.

However, the analyst estimates a third-quarter gross margin decline of 270 basis points to 65.3%, and an operating margin decline of 190 basis points to 29.3%, mostly due to the impact from Scientific Atlanta.

Longer term, Sue is looking for gross margin recovery toward the 66% to 67% range, and operating margin recovery to about 30% to 31%.

"Longer-term trends in the commercial and carrier segments continue to strengthen," said the analyst.

Sue expects Cisco to report third-quarter earnings of 26 cents per share, in line with consensus estimates. For calendar 2006, he is estimating for 10% year-over-year organic growth to earnings of $1.09 per share on revenue of $29.9 billion, versus consensus of $1.12 on $30.8 billion.