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Factors Likely to Influence Cisco's (CSCO) Earnings in Q2

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Cisco Systems Inc. CSCO is scheduled to report second-quarter fiscal 2019 earnings on Feb 13. The company outpaced the Zacks Consensus Estimate for earnings in the trailing four quarters, recording average positive surprise of 3.5%.

In the first quarter, the company delivered non-GAAP earnings of 75 cents per share coming ahead of the Zacks Consensus Estimate of 72 cents per share. Further, the figure surged 22.9% from the year-ago quarter.

Revenues increased 7.7% year over year to $13.072 billion and surpassed the Zacks Consensus Estimate of $12.871 billion. Acquisitions contributed 80 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 second-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 $12.4 billion, representing year-over-year growth of 4.3%.

Non-GAAP earnings are anticipated between 71 cents and 73 cents per share. The Zacks Consensus Estimate for earnings is pegged at 72 cents, representing year-over-year growth of 14.3%.

Shares of the company have gained 18.2% on a year-over-year basis, outperforming the industry’s rally of 17.8%.

Factors Likely to Influence Q2 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 (10.9% of first-quarter revenues) increased 18% from the year-ago quarter to $1.42 billion. The Zacks Consensus Estimate for Applications is pegged at $1.34 billion, representing year-over-year growth of 13.4%.

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.

Moreover, impressive performance of Security segment deserves a special mention. Security (4.9% of revenues) climbed 11% to $651 million. Strong growth can be attributed to solid demand witnessed by web security, unified threat, network security and advanced threat solutions. The Zacks Consensus Estimate for Security is pegged at $629 million, representing year-over-year growth of 12.7%.

Cisco’s AI-driven Talos intelligence platform blocks billions 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.

Infrastructure Platforms (58.5% of total revenues) comprising Switching, NGN routing, Wireless and Data Center solutions, grew 9% from the year-ago quarter to $7.64 billion.

The year-over-year increase can primarily be attributed to robust growth across switching, wireless and data center business. Switching revenues witnessed robust growth across campus and data center. Adoption of new campus switch, Cat9K and Nexus 9K 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 many customers. This has enabled customers in becoming more flexible. The company’s latest offering includes Catalyst 9800 wireless controller. Moreover, results benefited from the continuing customer shift from 100G to 400G architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.

The Zacks Consensus Estimate for Infrastructure Platforms is currently pegged at $7.061 billion, representing year-over-year growth of 5.5%.

Acquisitions: Key catalysts

The company recently announced its intention to buy Luxtera.  With Luxtera buyout, Cisco aims to expand its optical transceiver portfolio to support higher bandwidth, primarily for its data center customers. The company’s Luxtera acquisition is expected to assist it in maintaining market dominance and favor top-line growth.

Cisco had also successfully closed the acquisition of privately-held Duo Security. Further, the integration of Duo’s zero trust MFA technology with Cisco’s network and cloud security platforms is likely to enhance security features and mitigate phishing incidents on devices. This buyout will aid Cisco to deliver on its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.

The company also closed its previously announced Burlingame, CA-based July Systems acquisition. The private company provides cloud-based mobile application platform. Per the press release, July Systems team will join the company’s Enterprise Networking Group.

The company has also announced an agreement to sell its Service Provider Video Software Solutions (“SPVSS”) business. This transaction is anticipated to close in the second quarter of fiscal 2019.

We believe that company’s expanding footprint in the rapidly growing security market holds promise. Security solutions of Cisco are likely to witness traction, going forward. The company’s extended partnerships with the likes of Aon, Allianz and Rackspace are likely to boost security segment growth.

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

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Cisco has a Zacks Rank #3 and an Earnings ESP of +1.28%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks with Favorable Combination

Here are few other stocks that are worth considering as our model shows that these too have the right combination of elements to deliver an earnings beat in the upcoming releases.

Portland General Electric Company POR has an Earnings ESP of +4.19% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lumentum Holdings Inc. LITE has an Earnings ESP of +0.19% and a Zacks Rank #2.

Vertex Pharmaceuticals Incorporated VRTX has an Earnings ESP of +7.25% and a Zacks Rank #3.

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