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Cisco Receives Adverse Ruling Against Arista in California

Zacks Equity Research

Cisco Systems Inc. CSCO recently received an adverse ruling in a copyright infringement lawsuit against close rival Arista Networks ANET. The jurors at the federal court in San Jose, CA ruled that Arista did not commit any notable infringement on any Cisco patent and consequently, would not pay any damages.

Per Reuters “The jury found that Arista infringed some of Cisco's copyrights. However, jurors also said Arista proved that external factors, other than Cisco's creativity, dictated the design of Cisco's content.”

Cisco plans to appeal the jury ruling. The company had been seeking nearly $335 million in damages over patent infringement of its command-line interfaces. The lawsuit is one of the two cases the company filed in 2014 that accuses Arista of infringing 14 patents.

The ruling is particularly shocking for Cisco given the fact that it recently won a patent ruling against Arista at the U.S International Trade Commission (ITC). The ITC judge found Arista guilty of infringing Cisco’s two patents. The ruling is scheduled for a review over the next few months by the ITC. If found guilty, ITC has the authority to place a ban on import of Arista’s products in the U.S.

CISCO SYSTEMS Price and Consensus


CISCO SYSTEMS Price and Consensus | CISCO SYSTEMS Quote

Cisco-Arista Rivalry Intensifies

The rivalry between Cisco and Arista has intensified in recent years. Although Cisco holds more than 50% of the market share in the switching business, Arista’s meteoric rise has affected its top-line growth and profitability.

Arista was founded in 2004 by two former Cisco executives. Per Reuter’s data, the company’s annual revenue jumped 43% since its Initial Public Offering (IPO) in 2014 to $837 million at the end of 2015. Over the same period, Cisco’s total revenue increased 4.3% to $49.25 billion.

Notably, Cisco’s switching revenues increased 5.3% in fiscal 2015, but remained almost flat in fiscal 2016. Apart from Arista, the company’s switching business faces significant competition from the likes of Huawei, Hewlett Packard Enterprise HPE and Juniper Networks JNPR.

Stock Price Overview

Shares of Cisco have underperformed the broader Zacks Computer Networks industry on a six-month basis. While the stock has returned 5.8%, while the industry gained 6.5%.

The underperformance could be attributed to intensifying competition from several smaller players, slowing order growth from service providers and challenges in the emerging markets.

Notably, in the trailing six-month period, Arista, Juniper and Hewlett Packard shares have gained 34.4%, 23.2% and 25.3%, respectively.


Zacks Rank & Key Pick

Cisco currently carries a Zacks Rank #4 (Sell). Arista with Zacks Rank #2 (Buy) is a better-ranked stock in the sector. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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