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Cisco (CSCO) Up 2.8% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Cisco Systems, Inc. CSCO. Shares have added about 2.8% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is CSCO due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Cisco delivered second-quarter fiscal 2018 non-GAAP earnings of 63 cents per share beating the Zacks Consensus Estimate of 59 cents. Further, the figure increased 6 cents from the year-ago quarter of 57 cents.

Revenues increased 3% year over year to $11.887 billion and marginally surpassed the Zacks Consensus Estimate of $11.817 billion. Acquisitions contributed 80 basis points (bps) to revenue growth in the quarter. Security, Infrastructure Platforms and Applications revenues increased in the quarter.

Management provided positive top-line guidance for third-quarter fiscal 2018 based on order strength and improving traction of the subscription-based model.

Top-line Details

Products (73.3% of total revenues) increased 2.5% to $8.71 billion, while services (26.7% of total revenues) increased 2.9% to $3.18 billion. Almost 33% of the revenues were recurring in nature.

Revenues from subscriptions represent 52% of the company’s software revenues, which surged 36% from the year-ago quarter.

Geographically, on a year-over-year basis, revenues from both the Americas and EMEA increased 6%, each. APJC revenues remained flat during the quarter. Total emerging markets grew 1% while the BRICs less Mexico went down 1%.

In terms of customer segments, enterprise increased 3%, while service provider dipped 5%. However, commercial and public sector rose 14% and 8%, respectively.

Total product orders increased 5%. Cisco realigned reporting segments into five distinct categories — infrastructure platform, applications, security, services and other.

Wireless, Switching Witnessed Growth

Infrastructure Platforms (56.3% of second-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues increased 2% from the year-ago quarter to $6.69 billion.

The year-over-year increase was primarily due to robust growth across business. Switching revenues also increased. Moreover, the company witnessed strong demand for the intuitive network solution in the quarter. Further, wireless revenues were strong and demand for the HyperFlex data-center solution along with Wave 2 offerings and Meraki was solid.

However, continued weakness in service provider and a slowdown in enterprise routing business remained a headwind during the quarter.

Management stated that the new subscription-based Catalyst 9000 switching platform has been adopted by more than 1,100 customers within a short span of time since its release. Moreover, results benefited from the continuing customer shift to 10 gig, 40 gig and 100 gig architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.

Cisco’s ACI solution is currently used by more than 4K customers. The company believes that ACI customers are benefiting from increased business agility owing to network automation, simplified management and improved security features of the product.

AppDynamics Drive Growth

Applications (9.9% of revenues) consist of Collaboration portfolio of Unified Communications, Conferencing and TelePresence, Internet of Things (IoT) and application software businesses such as AppDynamics and Jasper.

Segment revenues increased 6% to $1.18 billion. Collaboration revenues rose modestly, with AppDynamics being the major contributor. Deferred revenues jumped 18%.

Security Remains Strong

Security (4.7% of revenues) climbed 6% to $558 million. The results were noticeable as deferred revenues surged 38% from the year-ago quarter.

Strong growth was driven by solid demand for unified threat, advanced threat and web security solutions.

Others

Other Products segment (2.3% of revenues) contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 10% to $273 million.

Services (26.7% of revenues) segment climbed 3% from the year-ago quarter to $3.18 billion. This was driven by growth in software and solutions services.

Acquisitions

During the quarter, the company recently closed it previously announced acquisition of BroadSoft for $1.9 billion. The planned acquisition of Broadsoft will boost the company's recurring revenue base.

Cisco also completed the acquisition of Skyport Systems during the quarter.

Product Launches

During the quarter, the company witnessed enhanced product adoption. The majority of the companies including the likes of Ameritas and Orange selected Cisco to improve IT security, and enhance work processes and automation.

The company also announced various product innovations and partnership programs during the quarter. With emphasis on multicloud, the company announced its HyperFlex platform as well as its Container Platform, which is expected to further expand product portfolio. The company is also reportedly working on a hyperconnected car in collaboration with Hyundai, which will help it in penetrating the smart-vehicle solutions market.

Operating Details

Non-GAAP gross margin expanded 70 bps from the year-ago quarter to 64.7%. The increase primarily stemmed from higher product gross margin (up 90 bps) which was positively impacted by favorable product mix and improved productivity benefits.

Non-GAAP operating expenses during the quarter came in at $3.9 billion, up 2% year over year. Non-GAAP operating expenses, as percentage of revenues, decreased 10 bps to 32.9%.

As a result, Non-GAAP operating margin expanded 70 bps to 31.7%.

Balance Sheet and Cash Flow

Cisco exited the second-quarter with cash & cash equivalents and investments balance of almost $73.7 billion compared with $71.6 billion in the prior-year quarter. Cash & cash equivalents and investments available in the United States at the end of quarter were $2.4 billion. Cash flow from operations was $4.1 billion during the quarter.

Cisco repurchased approximately 103 million shares of common stock for an aggregate price of $4 billion. In the second quarter, the company paid a cash dividend of 29 cents per share.

Guidance

For third-quarter fiscal 2018, revenues are expected to rise 3-5% on a year-over-year basis. Non-GAAP earnings are anticipated between 64 cents and 66 cents per share.

Non-GAAP gross margin is expected in the range of 63-64%, while operating margin is anticipated between 29.5% and 30.5% for the quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter.

Cisco Systems, Inc. Price and Consensus

 

Cisco Systems, Inc. Price and Consensus | Cisco Systems, Inc. Quote

VGM Scores

At this time, CSCO has a subpar Growth Score of D. However, its Momentum is doing a bit better with a C. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks style scores indicate that the company's stock is suitable for value and momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise CSCO has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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