Cisco Systems, Inc. (NASDAQ:CSCO) released its latest earnings report last night, and the basic numbers were in line with expectations, but where the company really disappointed was in gross margins. The company did manage to prop up its gross margins through share repurchases, but investors weren’t fooled.

Cisco Systems

Evercore remains Equal-Weight on Cisco Systems

After the earnings report, analysts Mark McKechnie and Zachary Amsel of Evercore said they are maintaining their Equal-Weight rating and $24 per share price target on Cisco Systems, Inc. (NASDAQ:CSCO). They believe that shares will stay “range-bound” as Wall Street gets used to the idea of the 61.3% gross margins. That’s the lowest percentage Cisco has reported in 12 years, but they think Cisco could be facing another level shift. They expect the company to bend a bit on its 61% to 62% gross margin target and simply say the 60% range instead.

Brian Fox, senior VP and portfolio manager at Standard Life Investments, also noted the weak margins.

“Cisco numbers came in broadly in-line with expectations as a larger than expected share buyback in the quarter helped EPS and masked some weakness under the covers,” said Fox. “Their core switching and routing businesses saw double digit sales declines vs. last year and product margins were the weakest they have been in quite some time. The latter will be a key focus of the market as the extent to which pricing pressure contributed to the margin decline could feed concerns around competition.”

Wall Street now questions Cisco’s growth potential

The Evercore team also noted that Cisco Systems, Inc. (NASDAQ:CSCO) reported a 4% decline in orders year over year, particularly in Service Provider orders, which declined 12%. Because of these declines, investors are starting to question whether there is any hope for further growth at Cisco Systems.

“Cisco’s valuation reflects a fair degree of skepticism around its future growth potential, and last night’s results will keep those questions front and center,” Fox said.

Looking ahead

The Evercore team notes that Cisco Systems, Inc. (NASDAQ:CSCO)’s April guidance was in line with expectations at between 47 cents and 49 cents per share with a 7% year over year decline in sales. They maintained their $2 earnings per share for the 2014 fiscal year and have introduced a fiscal 2015 forecast of $2.15 per share on $49 billion.

They see potential upside in Cisco Systems, Inc. (NASDAQ:CSCO)’s November and January quarters because of the company’s next router product cycle, which they said might even stabilize gross margins.