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Commentary

Despite Headwinds, Cisco Still Dominant

The networking giant's earnings were pressured by emerging markets, but its competitive position overall remains strong, writes Morningstar analyst Mike Hodel.

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 Cisco (CSCO) posted solid fiscal 2014 fourth-quarter results despite strong headwinds in most emerging markets and continued weakness in the service provider segment. Total revenue declined less than 1% year over year and increased 7% versus the prior quarter, the strongest sequential growth rate since sales recovered coming out of the financial crisis. Cisco expects fiscal 2015 first-quarter revenue will be flat to up 1% year over year, implying a small sequential decline. Management indicated that it sees no signs of recovery in emerging markets and it expects service provider sales will remain weak, factors that warrant caution on the quarter. Our fair value estimate assumes minimal growth in fiscal 2015. We also believe Cisco's market position overall remains strong.

Cisco highlighted several pockets of weakness during the fourth quarter across several emerging markets. Product orders in Russia, for example, were down 30% year over year, an understandable result given the tensions in Ukraine. Russia pulled the overall order growth in the EMEA region down 2 percentage points to 2% year over year. Orders in China and Brazil were down 23% and 13%, respectively. In addition to regional weakness, orders from service providers retreated, declining 11% year over year, with video products remaining particularly weak. Offsetting these areas, Cisco is doing well with business customers in developed markets. Commercial and enterprise orders in the United States were very strong, up 17% and 16%, respectively.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.