"Growth" markets declined 5% in constant currency (mostly due to China hardware), and this was the first time growth markets lagged mature markets. Systems (hardware) revenue of $3.25 billion fell 19% year-over-year (down 18% year-over-year excluding exchange rates) and was 11% below consensus of $3.64 billion. Management cited China as a major factor for the hardware decline, with China hardware sales down more than 40% year-over-year for the period. Roughly two-thirds of the hardware revenue decline was driven by "growth" markets while half was driven by China alone, of which management cited macro and execution as equal contributors.

Weakness in China is not a new issue for Cisco, and while the country is not broken out in disclosures, we believe it represents a low-single-digit portion of sales. We suspect the Chinese government has blocked Cisco for a number of quarters as retaliation of the U.S. government's treatment of Chinese supplier Huawei. We also believe Cisco has been a share gainer in servers with its Unified Computing System (UCS), while IBM has been a share loser. Other developing markets were weak in Cisco's July quarter and remain a risk, as does federal exposure.

We estimate Cisco's exposure to developing markets, including China, as just over 10% of sales, and we think the federal vertical is a mid-to-high-single-digit percent of sales versus 3% for IBM. IBM noted that its federal was often deemed critical and had not been affected by the recent shutdown. Finally, we like Cisco's shares based on valuation, improving trends in developed markets and our longer-term thesis regarding its strategy of evolving to a more software-centric business and we'd use a pull-back as a buying opportunity.