June 07, 2010

Cisco Systems, Inc. (CSCO-NASDAQ)

SUMMARY
Current Recommendation OUTPERFORM
Neutral
Cisco Systems is a leading provider of IP-based
Prior Recommendation
networking and other products. The company s third-
Date of Last Change 03/15/2010 quarter earnings beat the Zacks Consensus estimate.
Orders continued to strengthen in the last quarter,
Current Price (06/04/10) $22.95 reflective of the ongoing business momentum. New
$28.00 products, growth initiatives, improving operating
Target Price
performance, solid financials and a sound restructuring
policy are positives. Of course, competition remains
something to look out for, since the company has been
losing some market share. Additionally, the complicated
decision-making process and integration risks related to
the large number of acquisitions remain. However, we
believe the positives outweigh the negatives at this point.
Consequently, we are reiterating our Outperform
recommendation on CSCO shares.
SUMMARY DATA

52-Week High $27.57 Risk Level * Below Avg.,

52-Week Low $18.13 Type of Stock Large-Blend
One-Year Return (%) 15.53 Industry Comp-Networks
Beta 1.24 Zacks Industry Rank * 117 out of 291
Average Daily Volume (sh) 65,697,272
ZACKS CONSENSUS ESTIMATES
Shares Outstanding (mil) 5,726
Market Capitalization ($mil) $131,432 Revenue Estimates
Short Interest Ratio (days) 0.67 (In millions of $)
Institutional Ownership (%) 73 Q1 Q2 Q3 Q4 Year
Insider Ownership (%) 1 (Oct) (Jan) (Apr) (Jul) (Jul)
2008 9,554 A 9,831 A 9,791 A 10,364 A 39,540 A
Annual Cash Dividend $0.00 2009 10,331 A 9,089 A 8,162 A 8,535 A 36,117 A
Dividend Yield (%) 0.0 2010 9,021 A 9,815 A 10,368 A 10,829 E 40,033 E

5-Yr. Historical Growth Rates

2011 10,911 E 11,260 E 11,616 E 11,992 E 45,779 E
Sales (%) 9.5
Earnings Per Share Estimates
Earnings Per Share (%) 6.2 (EPS is operating earnings before non-recurring items, but including employee
Dividend (%) N/A stock options expenses)
Q1 Q2 Q3 Q4 Year
P/E using TTM EPS 17.0 (Oct) (Jan) (Apr) (Jul) (Jul)
2008 $0.37 A $0.36 A $0.35 A $0.37 A $1.45 A
P/E using 2010 Estimate 16.5
2009 $0.39 A $0.28 A $0.27 A $0.28 A $1.22 A
P/E using 2011 Estimate 14.5 2010 $0.32 A $0.35 A $0.40 A $0.32 E $1.39 E
2011 $0.37 E $0.38 E $0.40 E $0.43 E $1.58 E
Zacks Rank *: Short Term
1 3 months outlook 3 - Hold
Projected EPS Growth - Next 5 Years % 11
* Definition / Disclosure on last page

© 2009 Zacks Investment Research, All Rights reserved. www.Zacks.com 111 North Canal Street, Chicago IL 60606
OVERVIEW

Cisco Systems Inc. is an Internet protocol (IP)-based networking company, which also offers other
products, technologies and related services to communications and information technology service
providers, companies, commercial users and individuals.

The company reports revenue according to five geographic segments. The U.S. and Canada was the
largest segment in 2009, generating 48% of revenue (down 9.2% from 2008), Europe 19% (down 5.2%),
Emerging markets including Eastern Europe, Latin America, the Middle East, Africa, Russia and the
Commonwealth of Independent States 10% (down 11.3%), Asia Pacific 9% (down 12.6%) and Japan
3% (up 1.0%).

Revenue by Geography in 2009

Japan, 3%
Asia Pacific, 9%

Emerging
Markets, 10%

Europe, 19% U.S. and Canada,

48%

Cisco is one of the largest providers of routers and switches. Routers are responsible for transporting
information in the form of data, voice and video from one IP network to another. The nature of the router
determines the security, reliability, scalability and efficiency of the transmission process.

Switches play an important part in the aggregation and distribution of information. They collect
information in local area networks (LANs), metropolitan area networks (MANs) and wide area networks
(WANs), filtering, processing and distributing it in the required volume and to the designated locations.
They typically provide connectivity to end users, workstations, IP phones, access points and servers.

The Advanced Technologies product line includes seven product categories. Application networking
services are special products designed for secure transfer of applications within a local or wider area, at
the same time ensuring the security of computing resources. The home networking line provides
connectivity to the Internet, printers, music, movies and games through voice and data modems, routers,
network cards, media adapters, Internet video cameras, network storage and universal serial bus (USB)
adapters.

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Security includes both products and services designed to prevent unauthorized access to system
resources and offering a certain level of protection from worms, spam, viruses and other malware. The
storage area networking (SAN) category provides multilayer, secure, scalable connectivity between
servers and storage systems. Unified Communications products are available as software, standalone
devices and integrated components in routers and switches. They enable the distribution of voice, video,
data and mobile applications on fixed and mobile networks, enriching user experience.

Video systems include digital set-top boxes and media technology products, which enable reception,
encoding, transcoding, transrating, multiplexing, switching and modulation. Wireless technology includes
networking products, such as access points, wireless LAN controllers, wireless integrated switches and
routers, wireless management software, wireless LAN clients and client software, bridges, antennas and
accessories.

The Other products segment includes analog and digital optoelectronics products, as well as cable
access and voice over IP (VoIP) services. New and emerging technologies are being added to this
segment.

The company also offers related Services. Other than technical support, Cisco also offers
comprehensive specialized services under dedicated programs that support its technologies, depending
on specific networking requirements.

Revenue by Product Line in 2009

Service, 19% Routers, 17%

Other, 4%

Advanced
Technologies, Switches, 33%
25%

Products are sold through a direct sales force, as well as systems integrators, service providers,
resellers, distributors and retail partners. Some of the more significant competitors include Alcatel-Lucent,
ARRIS Group, Aruba, Avaya, Brocade, Check Point, D-Link, LM Ericsson, Extreme, F5, Force10,
Fortinet, HP, Huawei, IBM, Juniper, Meru, Microsoft, Motorola, NETGEAR, Nortel, Riverbed and
Symantec.

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REASONS TO BUY

The company has developed a unique network system, which has been referred to as the Unified
Computing System (UCS). This is a revolutionary blade server system based on x86 architecture
that could transform data centers as they exist today. The system seeks to lower cost of ownership
by making the entire data center more network-centric, significantly reducing the number of
computers/servers required. Through its focus on virtualization, the UCS simplifies the operation of
the data center, making it much more flexible and scalable than ever before. The company has tied
up with many big software companies focused on virtualization in order to make this a reality. Some
of Cisco s partners in this venture include Accenture, BMC, EMC, Intel, Microsoft, NetApp, Novell,
Oracle, Red Hat and VMWare. Although a bold initiative, the move placed Cisco in the Visionary
quadrant of Gartner s Magic quadrant report for blade servers. Management stated that the
company already has 400 customers, most of which are either in the implementation or pilot stage.
With businesses looking to do more work online, more data centers are likely to come up. Moreover,
the existing infrastructure is also getting old, which should drive a major spending spree. We believe
these trends will play into Cisco s UCS strategy, since the company s solution will bring significant
cost advantage.

The company recently launched a carrier routing system called the CRS 3. Management has stated
that the use of multiple CRS-3s in the network would enable data transfer speeds of up to 322
terabits per second (tbps), significantly higher than the 92 tbps of the CRS-1, which is currently used
by many of the major carriers around the world. Cisco has beaten the competition with this product,
since the announcement was made in a market where competing products were 12 times slower,
according to management. Therefore, we may expect some market share gains. Additionally, there
are a couple of forces that are likely to push the rapid adoption of the new technology. First, the
increasing popularity of smart phones, which is pushing up demand for high-speed data, thus
increasing congestion in networks. Considering the growing demand for mobile internet devices, this
trend is likely to continue. Second, telecom carriers face cut-throat competition and the scope for
differentiation of offerings is very limited. Significant increases in speed could be a way of picking up
additional customers and reducing churn.

Cisco has been expanding into what management calls market adjacencies. This is basically a
company initiative to use core competencies to exploit opportunities in more than 30 adjacent
markets. The company has made some headway in three areas smart connected communities,
small business and smart grids. As part of the smart connected communities initiative, it has
partnered with Gale International to enter into an agreement with the Mayor of Incheon, Korea. The
partnership will build technology infrastructure at Songdo City in Incheon. Management expects the
partnership to open the door to other similar opportunities, especially in China. The small business
initiative was designed after consideration of all functions that a small business would require. Since
this segment is usually the first to recover as recessionary pressures ease off, management has
devoted some R&D dollars to develop products targeting it. For example, the recently introduced
ESW 500 switches are reasonably priced and come with necessary features and support.
Management has discussed the possibility of combining the small business offerings with cloud
computing to enable the company s partners to offer these customers future Cisco products on an
as-a-service basis. The smart grid program is intended to enable secure energy management on
electrical grids from the transmission to the consumption stage. To this end, Cisco has formed
agreements with a large number of companies, including IBM and GE, utilities such as Florida
Power & Light and Duke Energy, as well as standards authorities, such as Institute of Standards and
Technology, Federal Regulation and Oversight of Energy, and North American Electric Reliability
Corporation. Other areas where it is also seeing opportunities include virtualization, collaboration
and video.

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 We are particularly encouraged by the pattern of order growth, which continued to improve in the
last quarter. After bottoming in the third quarter of fiscal 2009 and stabilizing over the next couple of
quarters, order growth has been very impressive over the last two quarters. Cisco saw broad-based
strength across all geographies, with all regions except Japan growing 30% or more and 12 of the
top 15 countries where Cisco has a presence seeing year-over-year increases. Moreover, in the
U.S., the strength was across enterprise, public sector, search provider, commercial and consumer
segments, all of which were up in the 25% range. The strength in orders indicates that capex
budgets have been increased. Consequently, it gives us confidence that the momentum in the
business will continue.

Fiscal 2009 (ended Jul 2009) was very difficult for Cisco, but management kept a tight rein on
expenses. Although revenue declined 8.7% for the year, operating profit dollars declined just 3.6%.
This is particularly commendable when you consider the relatively rigid cost of sales and the
discounts offered across several geographies in order to boost revenue. Expense control continued
in the first two quarters of fiscal 2010, with sales and marketing expenses as a percentage of sales
declining the most, followed by research and development, and then general and administrative.
With momentum expected to continue, management started increasing expenses in the last quarter.
As a result, margins dipped slightly. However, the strong revenue growth ensured that Cisco
continued to generate solid cash flows.

Cisco management has an ongoing restructuring policy, which management refers to as limited
restructuring. The idea behind this sort of restructuring is that management is exonerated from
making public announcements and complying with severance laws. For the most part, employees do
not get a bad deal, so the entire process is both quiet and smooth. Simultaneously, the workforce at
lower-cost locations, especially in India has continued to increase. Last year, management
announced a restructuring program that would reduce headcount by 1500 to 2000. These ongoing
activities continue to lower the expense base, thus improving profitability.

The company continues to boast a very strong balance sheet, with around $35.1 billion in highly
liquid short term investments and another $4.0 billion in cash. Total debt is negligible and the debt-
to-total capital ratio is 31.5% compared to 33% at the end of the January quarter. Management
returns value to customers through regular share repurchases and we expect this activity to continue
in the foreseeable future.

RISKS

Cisco continues to acquire a large number of companies. While this improves revenue opportunities,
it increases integration risks. The company operates in both developed and emerging economies;
therefore there are many cultures and practices that have to be incorporated within it. When
acquisitions are added to this, not only products and platforms, but also corporate cultures have to
be integrated. This takes up management time and effort, which could have been used for organic
growth.

Management has established a very elaborate decision-making process. Although it continues to

promote this process, there is increasing dissatisfaction from shareholders. Cisco s size itself slows
down the system and rather than simplifying processes, management has added several layers.
Management believes this helps to avoid mistakes, but although the large number of councils,

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 boards and committees might help in some situations, it also delays important decisions, which in
turn, increases reaction time to competitors actions.

The company is steadily losing market share to HP, Juniper, Fortinet and Palo Alto Networks in the
networking area. Certain channel conflicts in the server market are also contributing to share losses.
Cisco offers price discounts to outdo the competition, but the typically slow decision-making process
results in dubious gains. On the other hand, lower prices have the inevitable negative impact on
margins.

With the launch of its own blade server system, Cisco has naturally turned some of its partners,
such as HP, IBM and Dell into competitors. This could increase near-term friction. Additionally, these
companies are established players in the space, while Cisco is a new entrant without a complete
lineup of x86-based products. Although we do not expect immediate severance of ties with these
partners because of the level of mutual interdependence, the company is obviously saying goodbye
to sure revenue streams in pursuit of a goal that requires a paradigm shift of customers. We believe
this may not be very easy, particularly since most of these companies are strengthening ties with
networking companies (for example, HP with 3Com and IBM with Juniper) and may be expected to
come out with competing solutions in the not-too-distant future. Margins are also a consideration,
since Cisco s core networking business is likely higher-margin than the new area it is venturing into.

Because of the delayed decision-making, the company s pricing policy often appears inflexible
relative to peers and competition is ugly in some cases. For example, HP Pro-Curve has for long
snatched customers on a deal-by-deal basis, by offering significant discounts for exchanging Cisco
products. Chinese giant Huawei is making life difficult in China. The recently announced HP-3Com
combination could be a real threat to Cisco because 3Com has a strong position and important
relationships in China (including with Huawei). It essentially means further competition in China, as
HP has gained a position in the region through 3Com. Additionally, 3Com also has operations in
China, which reduce operating costs for HP.

RECENT NEWS

Cisco Systems (CSCO) third quarter 2010 earnings beat the Zacks Consensus estimate by 6 cents, or
17.6%. Revenue was more or less in line, exceeding by 1.4%.

Revenue

Revenue of $10.37 billion was up 5.6% sequentially, 27.0% year over year and just sightly better than
management s guidance range of a 2-5% sequential increase. Growth was balanced across customers
and geographies. Market share gains in routing and switching products were partially responsible for the
year-over-year increase.

Products generated 81% of revenue, increasing 5.8% sequentially and 31.4% year over year. Services
accounted for the remaining 19%, increasing 5.1% sequentially and 10.9% year over year.

Revenue was up across all geographies. Around 54% was generated in the U.S. & Canada (up 4.3%
sequentially), 21% came from Europe (up 10.1%), Emerging markets 11% (up 3.3%), Asia Pacific 11%
(up 6.1%) and Japan 4% (up 6.7%). All geographies increased strong doube-digits on a year-over-year
basis.

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 Revenue by Product Line

$10,000

$9,000

$8,000

$7,000

US$ (Millions) $6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Quarter Ending Date

Routers Switches Advanced Technologies Other Total Product Service

Product Revenue by Category

Routers were 17% of total revenue, representing a sequential increase of 9.9% and a year-over-year
increase of 23.7%. The year-over-year increase was driven by a 37% growth in high-end routers, which
typically make up around two-thirds of total sales. Mid-range and low-end routing grew 1% and 7%,
respectively. New products are being well accepted by customers and continued to grow strongly in the
quarter.

Switching revenue reached record levels in the last quarter, accounting for a 35% revenue share.
Revenue was up 6.6% sequentially and 41.3% year over year (the strongest year-over-year growth
experienced over the last decade or so). Modular switches, which make up a relatively smaller
percentage of total switching revenue grew 45%, while fixed switching, which makes up the balance grew
30% from the year-ago quarter.

Advanced Technologies generated 24% of revenue, up 2.3% sequentially and 17.2% year over year. All
product lines within this category grew strongly from the year-ago quarter, with wireless growing 27%,
unified communications 26%, video systems 9% and security 15%.

The Other segment brought in 6% of revenue, increasing 4.3% sequentially and 70.3% year over year.
Strength in optical and cable products; the positive impact of the Pure Digital acquisition, which added
the flip video product line; as well as some success with emerging technologies, such as UCS,
telepresence and physical security drove the year-over-year increase. We will continue to watch the
progress of the UCS business keeping in mind the competitive scenario involving Hewlett Packard
Company (HPQ), International Business Machines (IBM) and Juniper Networks (JNPR) among others.

Orders

Order growth was also strong, indicative of momentum in the business. Orders increased 30% or more
across all geographic theaters except Japan. Japan was up in the low single-digit percentage range.
Twelve out of the 15 countries in which Cisco has a presence grew more than 20%.

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All major segments within the U.S. rebounded strongly, with revenues from enterprise, public sector,
search provider, commercial and consumer segments growing in excess of 25% year over year.

Gross Margin

The company generated a gross margin of 64.6% in the last quarter, which was a sequential decrease of
50 bps and a year-over-year decrease of 3 bps.

The product gross margin of 64.3% was down 39 bps sequentially and up 57 bps year over year.
Competition has stiffened over the past few months, forcing management to offer heavy discounts. This
was the main reason for the sequential contraction, although the impact was softened by higher volumes
and cost savings. Volumes were significantly higher than in the year-ago quarter, which coupled with mix
benefits, offset the negative impact of heavy discounting.

The services gross margin of 62.3% contracted 136 bps sequentially and 289 bps year over year. Both
the sequential and year-over-year declines were on account of higher personnel expenses associated
with an extra week of operation and a higher mix of advanced services, although these were partially
offset by higher volumes.

The U.S. and Canada theater saw its gross margin decline from the year-ago quarter, although other
geographic theaters expanded margins. However, the U.S. and Canada theater was stable sequentially,
while other regions declined.

Operating Performance

The operating expenses of $4.13 billion were higher than the previous quarter s $3.74 billion. The
operating margin was 24.8%, down 215 bps sequentially, but up 161 bps year over year. The sequential
decline was due to increase in all expenses as a percentage of sales, although R&D increased the most.
The improvement from the year-ago quarter was driven by lower S&M expenses as a percentage of
sales, helped by lower R&D and partially offset by higher G&A and COGS (as a percentage of sales).

Revenue and Margins

$14,000 70%

$12,000 60%

$10,000 50%
US$ (Millions)

$8,000 40%

$6,000 30%

$4,000 20%

$2,000 10%

$0 0%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Quarter Ending Date

Revenue Gross Profit Operating profit EBITDA

Gross Margin Operating Margin Cash Margin

On a pro forma basis, Cisco generated a net income of $2.34 billion, or a 22.6% net income margin
compared to a $2.06 billion, or 21.0% in the previous quarter and $1.55 billion or 19.0% net income

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 margin in the same quarter last year. Our pro forma estimate excludes intangibles amortization charges
on a tax-adjusted basis but includes stock based compensation expenses in the last quarter. Our pro
forma calculations may differ from management s presentation due to the inclusion/exclusion of some
items that were not considered by management.

On a fully diluted GAAP basis, the company reported a net income of $2.19 billion ($0.37 per share)
compared to $1.85 billion ($0.32 per share) in the previous quarter and $1.35 billion ($0.23 per share) in
the prior-year quarter.

Balance Sheet

Cisco ended with a cash and investments balance of $39.11 billion, a slight decrease of $532 million
during the quarter. The company generated very strong operating cash flow in the third quarter that
nearly equaled the cash generated in the first two quarters combined. Cisco spent $291 million on capex,
$2.64 billion on acquisitions net of cash and equivalents acquired, and $2.20 billion on share
repurchases. The net cash position at quarter-end was $26.99 billion. Including short term debt and long
term liabilities, the debt-cap ratio was a mere 31.5%.

Inventories increased 2.9% to $1.25 billion, with inventory turns increasing from 11.1X to 11.8X. Days
sales outstanding (DSOs) were down from 39 to around 36.

Guidance

In the fourth quarter, management expects revenue growth of 3-5% on a sequential basis and 25-28% on
a year-over-year basis. The normal sequential increase from the third to the fourth quarter is 5-6%. The
less-than seasonal increase is not related to weakness, but the extra weak operated in the third quarter.
Additionally, the TANDBERG acquisition, which generated $200-300 million in the last few quarters, is
expected to fetch $200 million next quarter.

The gross margin is expected to be 64-65%, operating expenses 36.5-37% of revenue, interest and other
income of approximately $10 million and a tax rate of 21%. The GAAP EPS, including stock based
compensation of 9 cents a share is expected to be around $0.06 to $0.07.

Management expects the company to generate operating cash flow of $2-2.5 billion.

VALUATION

Cisco shares are down 7.0% since the beginning of the year, slightly more than the S&P 500, which is
down 6.0%.

The company s current trailing 12-month earnings multiple is 17.0X, compared to 44.1X average for the
peer group and 18.7X for the S&P 500. Over the last five years, Cisco s shares have traded in a range of
10.7X to 26.5X trailing 12-month earnings. Therefore, it is currently trading slightly below the middle of
the range.

The stock is also trading at a significant discount to the peer group, based on forward earnings estimates.
The current 48% discount to the peer group for 2010 is also well below the middle of the historical range.

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 All these factors point to growth from current levels.

Additionally, the company is seeing solid momentum across all its businesses. It is also introducing
leading edge products that have the potential to generate significant growth, and possibly, market share
gains.

Our Outperform recommendation on the stock indicates that we expect it to trade higher over the next
three to six months. Our $28.00 target price, 20.1X 2010 EPS, reflects this view.

Key Indicators

P/E P/E
5-Yr 5-Yr
P/E P/E Est. 5-Yr P/CF P/E High Low
F1 F2 EPS Gr% (TTM) (TTM) (TTM) (TTM)
Cisco Systems, Inc. (CSCO) 16.5 14.5 11.6 15.4 17.0 26.5 10.7

Industry Average 31.5 17.9 15.4 23.8 44.1 260.1 23.8

S&P 500 13.1 11.2 10.7 12.4 18.7 27.7 13.8

Brocade Communications Systems (BRCD) 12.9 12.0 10.3 6.1 15.1 27.2 4.6
McAfee Inc (MFE) 16.0 13.9 14.3 11.2 18.3 32.5 17.7
TTM is trailing 12 months; F1 is 2010 and F2 is 2011, CF is operating cash flow

P/B
Last P/B P/B ROE D/E Div Yield EV/EBITDA
Qtr. 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM)
Cisco Systems, Inc.
(CSCO) 3.0 6.5 2.3 18.5 0.3 0.0 11.0

Industry Average 2.4 2.4 2.4 -10.4 0.2 0.0 6.1

S&P 500 3.2 10.0 2.9 23.5 0.0

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Earnings Surprise and Estimate Revision History

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StockResearchWiki.com The Online Stock Research Community
Discover what other investors are saying about Cisco Systems (CSCO) at:

CSCO Profile on StockResearchWiki.com

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of CSCO. The EPS and revenue forecasts are the Zacks Consensus
estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal
views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly,
related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this
report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to
accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet
the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an
offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a
position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the
securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to
twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve
months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The
current distribution of Zacks Ratings is as follows on the 990 companies covered: Outperform - 14.0%, Neutral - 79.5%, Underperform 6.1%.
Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in
earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model
assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks
Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a
company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of
investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In
determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each
th
stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest
values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the
second, third, and fourth groups of stocks, respectively.

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