Relatively easy year-on-year comparison numbers and expanding gross margins helped Cisco deliver a respectable earnings quarter, suprising analysts and lifting the stock 8% in morning trading.
Cisco shares rose $1.83 to 24.64 (up 8.02%), after the company reported third fiscal quarter sales of $11.55 million, slightly estimates of around $11.4M, and delivered earnings per share (EPS) of $0.51. The analysts consensus estimates were for .48 EPS.
But Cisco is not out of the woods yet — it’s still not growing, and it faces a host of threats from new Software Defined Networking (SDN) players. Management expects EPS for the next quarter in the range of of $0.51-0.53. Consensus estimates are for $0.51.
The biggest surprise came in gross margins, which came in a percentage point and a half above estimates at 62.7%.
Analysts have a more bullish tilt about Cisco now that it has stabilized revenue, earnings, and margins.
“We like owning Cisco when orders are accelerating, and it happened in 3QFY14 with orders coming in slightly better than flat y/y from -4% in the prior quarter,” wrote MKM Partners Managing Director Michael Genovese in an earnings not this morning.
Cisco management sees the next quarter producing revenues in a range of $12.05B-$12.30B, which would represent growth of -1% to -3% from the comparable quarter in the prior year. This is higher than many analysts have expected. This gave some analysts comfort that Cisco has set itself up to beat expectations.
Raymond James analyst Simon Leopold raised his price target from $26 to $28 on Cisco.
“We believe Cisco benefits from several product cycles and easing comparisons” wrote Leopold in this morning’s research note. “Our longer-term thesis is that Cisco has the right strategy focused on an evolution towards more software centric networks.”
MKM’s Genovese concurred that Cisco may have the wind at its backs with comps, pointing out that the rollout of the new Nexus 9000 data-center switches should help Cisco. The new Nexus is the first product line of Cisco’s to include elements of its Application Centric Infrastructure (ACI) initiative, Cisco’s flavor of SDN. The product is expected to ramp this quarter.
“The fact that the y/y order comps stay consistent in 4QFY14 (and then get much easier in 1QFY15) should also help the current quarter’s results in a backdrop where key new products are ramping,” wrote Genovese.