Cisco Controlling Costs and Demand Up; Maintain $48 FVE

Narrow-moat Cisco Systems CSCO surpassed CapIQ consensus expectations, with revenue falling 9% year over year alongside adjusted EPS of $0.76 in the first quarter. Although Cisco is benefiting in certain areas, like an increased need for remote collaboration and cloud security, its core products have been hampered by soft networking infrastructure upgrade demand amid widespread sheltering in place. Nonetheless, we believe that Cisco is turning the corner after a few quarters of declining sales due to the pandemic, and we expect to see improved performance in the second quarter. With Cisco more positive about the demand environment ahead, shares increased over 7% after reporting. We are maintaining our $48 fair value estimate and believe shares are undervalued.

Compared with the prior year, infrastructure platforms declined by 16% and applications shrank by 8% while security grew by 6% and services expanded by 2%. Within infrastructure platforms, switching, routing, data center, and wireless all declined, largely because of weakness in the commercial and enterprise markets. The Catalyst 9k continues to perform well and Wi-Fi 6 products were a highlight in the quarter. Although WebEx had strong growth, unified communications and telepresence endpoints pulled down the results for applications. Security strength was led by cloud security, Duo, and Umbrella offerings. We continue to expect the combination of security and networking to be a key growth engine for Cisco, and for the company's SD-WAN and hyperscale cloud offerings to perform well.

Product orders were down 5% year over year, as enterprise contracted 15%, commercial was down 8%, and service provider shrank by 5%, while the public segment grew by 5%. Total remaining performance obligations grew 10% annually to $27.5 billion. Guidance for the second quarter includes a year-over-year revenue decline of 1% at the midpoint, adjusted operating margin of 32%-33%, and adjusted EPS of $0.74-$0.76.

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