Cisco enterprise growth slowing

Investment firm UBS Warburg this week downgraded Cisco stock

Investment firm UBS Warburg this week downgraded Cisco stock, citing slowing orders and softness in US and European enterprise markets..

The firm cut its revenue estimates for Cisco's fiscal fourth quarter, which ends in July, from 6 per cent to 4 per cent on a sequential basis and to 6 per cent "organic" growth -- excluding acquisitions -- year over year.

"Our industry checks show orders are slowing, which gives us concern about the July quarter," states UBS analyst Nikos Theodosopoulos in his bulletin on the downgrade. "Recent checks indicate that in addition to prior softness in US Enterprise, European Enterprise is slowing a bit, and Emerging Markets, while still strong, are growing in the 25 per cent to 30 per cent range, not the 30 per cent to 40 per cent target."

UBS also is lowering its fiscal 2008 and 2009 revenue growth estimates for Cisco. Estimates for 2008 are now 12.4 per cent from 12.8 per cent. For the following year, expectations have been lowered to 7.9 per centfrom 9.2 per cent. Earnings-per-share estimates have been lowered by 1 cent for 2008 and 3 cents for 2009.

Cisco stated bullishly in recent quarters that it expects annual revenue growth in the 12 per cent to 17 per cent range, but CEO John Chambers warned that the third and fourth quarters of fiscal 2008 could be "extremely challenging." UBS now feels Cisco will need to make acquisitions to grow at that 12 per cent to 17 per cent clip.

"Historical analysis of US$40 billion tech companies shows it's virtually impossible to grow 12 per cent to 17 per cent without requiring acquisitions and compromising operating margins," Theodosopoulos states. "We believe Cisco's aggressive target will require acquisitions. We think the stock will have a hard time rallying if demand is slowing and acquisitions are likely."

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