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Cisco (CSCO) to Report Q1 Earnings: What's in the Cards?

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Cisco (CSCO) to Report Q1 Earnings: What's in the Cards?

Cisco's (CSCO) Order strength and improving traction of the subscription-based model were tailwinds.

Cisco Systems Inc. CSCO is scheduled to report first-quarter fiscal 2019 earnings on Nov 14. The company outpaced the Zacks Consensus Estimate for earnings in the trailing four quarters, with an average positive surprise of 2.9%.

In the fourth quarter, the company delivered non-GAAP earnings of 70 cents per share coming ahead of the Zacks Consensus Estimate by a penny. Further, the figure rose 14.7% from the year-ago quarter.

Revenues increased 6% year over year to $12.844 billion and surpassed the Zacks Consensus Estimate of $12.763 billion. Acquisitions contributed 90 basis points (bps) to revenue growth in the reported quarter.

Strength witnessed in the company’s Security and Applications segments drove year-over-year growth. Order strength and improving traction of the subscription-based model were other tailwinds.

Guidance & Estimate

For first-quarter fiscal 2019, revenues are expected to grow 5-7% on a year-over-year basis. The Zacks Consensus Estimate for revenues is pegged at $12.87 billion, representing year-over-year growth of 6.1%.

Non-GAAP earnings are anticipated between 70 cents and 72 cents per share. The Zacks Consensus Estimate for earnings is at 72 cents, translating to year-over-year growth of 18%.

Shares of the company have gained 26.5% on a year-to-date basis, outperforming the industry’s rally of 22.8%.

Factors Likely to Influence Q1 results

Application software businesses such as AppDynamics and Jasper which are reported under company’s Applications segment, witnessed significant traction. Additionally, Unified Communications infrastructure and TelePresence endpoints also drove collaboration revenue growth.

Applications (10.5% of third-quarter revenues) increased 10% from the year-ago quarter to $1.34 billion.

Cisco had integrated its Spark with Webex Platform which enhanced Webex Meeting. This enabled it to introduce Webex Teams, further strengthening the company’s collaboration portfolio.

The company also recently announced a new partnership with Alphabet Inc. The integration was aimed to automate responses in its centers by leveraging data and intelligence from AI.

Moreover, impressive performance of Security segment deserves a special mention. Security (4.9% of revenues) climbed 12% to $627 million. Strong growth can be attributed to solid demand witnessed by web security, unified threat, network security and advanced threat solutions.

Cisco’s AI-driven Talos intelligence platform blocks 20 billion threats per day. The company’s efforts to leverage machine-learning to deploy security platforms to mitigate online risks on a real-time basis bode well.

The Zacks Consensus Estimate for Applications and Security is pegged at $1.345 billion and $652 million, respectively.

Infrastructure Platforms (57.9% of total revenues) comprising Switching, NGN routing, Wireless and Data Center solutions, grew 7% from the year-ago quarter to $7.44 billion.

The year-over-year increase was primarily due to robust growth across switching, wireless and data center business. Switching revenues increased witnessed strong growth across campus and data center. Adoption of new campus switch, Cat9K was impressive.

Further, wireless revenues grew on the back of company’s Wave 2 offerings and Meraki solution. Robust demand for the HyperFlex data-center solution drove data center’s double-digit growth.

Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by more than 9,650 customers, up 3,850 sequentially. Moreover, results benefited from the continuous customer shift to 100 gig architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.

The Zacks Consensus Estimate for Infrastructure Platforms is currently pegged at $7.416 billion.

Collaborations & Acquisitions: Key catalysts

The company recently closed the acquisition of Accompany for $270 million. The newly acquired company is set to join Collaboration Technology Group (“CTG”) of Cisco. Accompany’s robust enterprise AI capabilities will reinforce Cisco’s collaboration portfolio.

The company also announced it plans to acquire Burlingame, CA-based July Systems. The private company provides cloud-based mobile application platform. With this buyout, Cisco will strengthen its Enterprise Wi-Fi platform by bolstering advanced indoor-based location services capabilities.

The company also displayed interest in buying Duo Security. This private company leads the market in trusted access and MFA technologies. It aids enterprises in defending against breaches through its effective cloud-based Trusted Access product suite.

Cisco’s current client portfolio already includes big names such as Intel, Microsoft, Oracle, Apple, and Alphabet, to name a few.

These factors are likely to boost top-line growth in the to-be-reported quarter.

Risks Persists

However, weakness in the switching and routing is a headwind. Moreover, ongoing transition to subscription-based model will continue to hurt the top line. Arista’s ANET recent intention of manufacturing switches that connect campus networks is likely to hurt Cisco as it holds a dominant position in that market.

What the Zacks Model Unveils?

Our proven model shows that Cisco is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Cisco has a Zacks Rank #3 and an ESP of 0.00%.

Stocks With a Favorable Combination

Here are some companies you may want to consider as our model shows that these stocks have the right combination of elements to post an earnings beat:

NetApp, Inc. NTAP with an Earnings ESP of +0.83% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meritor, Inc. MTOR has an Earnings ESP of +13.30% and a Zacks Rank #3.

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