Cisco to Resume Downtrend on Gross Margin Concerns

Cisco to Resume Downtrend on Gross Margin Concerns
February 24, 2016

Cisco Systems Inc (NASDAQ:CSCO) declined sharply below $25 in January, but quickly recovered to its 2015 trading range between $25 and $30. The dividend payout of the company has gone up from a mere $0.06 per share in 2011 to $0.26 per share in the second-quarter of fiscal 2016. The dividend represents a yield of 4.2% per annum.

Fundamentally, the world’s largest networking company performed well in the second quarter of fiscal 2016. The revenue increased 2% on a y-o-y basis to $11.8 billion. The non-GAAP net income for the second quarter of fiscal 2016 was $2.9 billion or $0.57 per share, up 8% from the prior year corresponding period. The forward price to earnings ratio is only 10.9 (forward PE ratio of S&P 500 is 16.6). The company is sitting on a cash pile of $34 billion.

However, a close look at the segment wise income would reveal some important facts about the company. The non-GAAP product margin was 63.3%, which is certainly less than the 70% margin it realized a decade before.

The San Jose, California based company derives 29% of its total revenue from the switching segment. In the second quarter of fiscal 2016, the revenue from the switching segment fell 4% to $3.48 billion.

The revenue from the NGN (Next Generation) routing segment increased 5% in fiscal 2Q16 to $1.85 billion. The NGN Routing segment accounts for 15.6% of Cisco’s total revenue. The core router segment is dominated by Cisco and Juniper Networks with a combined market share of 80%. In 2012, Alcatel-Lucent re-entered this segment to capture 24% of market share in three years. Cisco now faces serious competition in this segment as well.

Collaboration segment accounts for 8.6% of Cisco’s total revenue. During the second-quarter of fiscal 2016, the segment saw a rise of 3% increase in revenue to $1.02 billion. Cisco leads the segment with a market share of 15%. Microsoft has a market share of 13% in this segment and gives tough competition to Cisco.

Things are not going well for Cisco in the Data Center segment as well. The revenue declined 3% in the second quarter of fiscal 2016 to $822 million. Data Center segment accounts for 6.9% of Cisco’s revenue. The market share of Cisco declined from 58.7% in 2014 to 44% in 2015.

On a y-o-y basis, the company expects a revenue growth of only about 1% to 4% in the third-quarter. Unless Cisco registers an appreciable growth in the Switching and Data Center segment in the third quarter, the share price is not expected to go up further.

Technically, as shown in the image below, the stock faces heavy resistance at $27 level. A decline below $25 will take the stock to its next major support at $21 or even $17.

Cisco Systems Analysis - 24th February 2016

Thus, it is ideal for a binary options trader to purchase a put options contract with March end expiry. The suggested strike price for the contract is $24.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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