Wunderlich Securities analyst Matthew S. Robison maintains buy rating for Cisco Systems, Inc. (NASDAQ:CSCO).

Cisco Systems Logo

On December 12, the annual Cisco Systems (CSCO) Financial Analyst Conference (FAC) was held. In Wunderlich Securities’ analyst view, the success of the 2009 computing initiative and this year’s Insieme spin-in give Cisco Systems, Inc. (NASDAQ:CSCO) high ground for upgrade demand with Software Defined Networking (SDN) and Network Function Virtualization (NFV), despite challenges of general routing and switching market maturation (innovators dilemma) – especially in the realms of security, automated IT resource provisioning (private and public cloud), and mobility. Revised 3-5 year growth targets reflect revenue decline already anticipated for F2014 — emerging markets weakness and product transitions (expect significant router upgrade cycle next year). Overall analyst forecast is unchanged, as is research firm’s $25 price target and Buy recommendation.

Post mortem/reminder of first half issues

Management reviewed the backdrop for Cisco Systems, Inc. (NASDAQ:CSCO)’s surprisingly weak guidance given last month with 1Q14 results, emphasizing demand decline beginning late in the quarter and extending for all of the current quarter. Major factors include downside volatility in emerging markets (EM) and product transitions, which (broadly defined) include transition away from low price set-top boxes to software, as well as new core routers and near-term competitive weakness in edge and metro Ethernet routers.

Country-specific political/trade concerns make China a “wild card” and Brazil and Russia appear to remain in decline, although prospects for India are more optimistic. Meanwhile, management is confident of broad eventual recovery with domestic enterprise and commercial growth viewed as a proxy to validate the company’s favorable competitive position.

With two major releases last quarter for long sales cycle core routers, the CRS-X and the NCS, high-end router demand reflects processes of evaluation among customers. Since these products are largely uncontested, analyst at Wunderlich view recovery to be somewhat inevitable for high-end routing. Meanwhile, new lower-end NCS derivatives for metro-Ethernet products that research firm expect to enable the company to counter recent market share loss are due before year-end.

Cisco replacing labor with capital

Cisco Systems, Inc. (NASDAQ:CSCO) is increasingly going to market with a blend of data center functions for automation (Application Centric Infrastructure – ACI) with a pitch for total cost of ownership savings (TCO) on the order of 75%. With 5 weeks since formal introduction, the pipeline of ACI deals has grown to 305 customers and includes several of 8-9 figure magnitude. Analyst expect more blending of switching and routing with compute functions as SDN and NFV trends progress.

Mix shift to data center and price target

Management revised 3-5 year annual revenue and non-GAAP EPS growth guidance from ranges of 5%-7% and 7%-9%, respectively, to 3%-6% and 5%-7%. These growth rates start with F2013 and include F2014 decline of about 4% for revenue and 1% for non-GAAP EPS. Starting from F2013, research firm’s unchanged F2015 estimates represent a compound growth rate for Cisco Systems, Inc. (NASDAQ:CSCO)’s revenue of 1.4% and 3.2% for non-GAAP EPS.