RBC Capital says it’s bullish on the sustainability of Cisco Systems’ (CSCO) gross profit margins in the wake of the networking leader's fiscal Q3 earnings beat.
“Cisco continues to shift toward a recurring revenue business model with lower exposure to legacy routing and switching,” Mitch Steves, an RBC Capital analyst, said in a research report Monday.
Steves said RBC is "bullish on gross margins, given about $9 billion to $10 billion in software-related revenue and improved mix post the set-top box divestiture.” Cisco sold its set-top business to French firm Technicolor last July.
Steves has an outperform rating on Cisco stock, with a price target of 33. Cisco stock ticked down 3 cents to 27.94 at the close in the stock market today, after rising Thursday and Friday.
Late Wednesday, Cisco said revenue for its fiscal Q3 ended April 30 rose 3% from the year-earlier period, to $12 billion, just beating the consensus estimate of $11.97 billion, as polled by Thomson Reuters. Earnings per share minus items rose 5.6% to 57 cents, edging the consensus of 55 cents.
Cisco has a so-so IBD Composite Rating of 64 out of a possible 99.
“Cisco is continuing to change its business model, offering switching/routing at lower costs in exchange for higher services/software revenue,” said Steves. “At this point we do not see a material change in margins, given the business model changes.”
Cisco rival Juniper Networks (JNPR), meanwhile, was downgraded to market perform from outperform by William Blair, where analyst Dmitry Netis has just picked up coverage.
In a research note Monday, Netis said the transition from routers and switches to newer technologies, software-defined networking and network function virtualization remains an overhang for Juniper.
He also wrote that "the spending environment has not been particularly robust this year," pointing to Cisco's earnings last week.
Juniper stock was down 1%, to 22.49 at the close. Its shares have fallen 18% so far this year, while Cisco stock is up a fraction over the same period.
