Factors Setting the Tone for Cisco's (CSCO) Q4 Earnings

Cisco Systems Inc. CSCO is scheduled to report fourth-quarter fiscal 2018 earnings on Aug 15. The company outpaced the Zacks Consensus Estimate for earnings in three of the trailing four quarters, while matching the estimates once. This resulted in an average positive surprise of 2.5%.

In the third quarter, the company delivered non-GAAP earnings of 66 cents per share coming ahead of the Zacks Consensus Estimate by a penny. Further, the figure rose 10% from the year-ago quarter.

Revenues increased 4.4% year over year to $12.463 billion and marginally surpassed the Zacks Consensus Estimate of $12.421 billion. Acquisitions contributed 120 basis points (bps) to revenue growth in the last reported quarter.

Strength witnessed in 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 fourth-quarter fiscal 2018, revenues are expected to grow 4-6% on a year-over-year basis. The Zacks Consensus Estimate for revenues is pegged at $12.77 billion, representing year-over-year growth of 5.2%.

Non-GAAP earnings are anticipated between 68 cents and 70 cents per share. The Zacks Consensus Estimate for earnings is at 69 cents, translating to year-over-year growth of 13.1%.

Shares of the company have gained 14.3% on a year-to-date basis, outperforming the industry’s rally of 13%.

Factors likely to influence Fourth-Quarter results

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

Applications (10.5% of third-quarter revenues) increased 19% from the year-ago quarter to $1.31 billion.

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

With Webex Meetings, Webex Devices and Webex Teams yielding results, we believe Cisco is well poised to capitalize on the emerging AI based enterprise applications.

Moreover, impressive performance of Security segment deserves a special mention. Solid demand witnessed by web security, unified threat and advanced threat solutions remain segment’s growth drivers.

Security (4.7% of revenues) climbed 11% to $583 million. The results were noticeable as deferred revenues surged 38% from the year-ago quarter.

Cisco’s AI-driven Talos intelligence platform blocks 20 billion threats per day. Recently, Talos unit identified that almost 500K storage devices and routers across 54 countries are infected with malware similar in nature to the one used to attack Ukraine.

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 $1.414 billion and $614 million, respectively.

Infrastructure Platforms (57.5% of total revenues) comprise Switching, NGN routing, Wireless and Data Center solutions, inched up 2% from the year-ago quarter to $7.16 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.

Cisco’s ACI solution continues to witness traction. The company believes that ACI customers are gaining from increased business agility owing to network automation, simplified management and improved security features of the product. Management remains optimistic on the newly introduced ACI SDN offering.

The Zacks Consensus Estimate for Infrastructure Platforms is currently pegged at $7.269 billion.

Focus on Enhancing Cloud Offerings Bodes Well

Cisco recently 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.

July Systems boasts of valuable customers, comprising SAP SE SAP, lululemon athletic, among others. The proficiency that July Systems brings on board will power Cisco’s intent-based networking movement.

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

Underlying Risks

The company continues to face intense competition from Arista Networks which recently announced its intention of manufacturing switches that connect campus networks. This move of Arista is likely to hurt Cisco as it holds a dominant position in that market.

Moreover, ongoing transition to subscription-based model remains a headwind at least in the near term.

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 +0.07%.

Other Stocks With a Favorable Combination

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

Palo Alto Networks, Inc. PANW has an Earnings ESP of +0.52% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

CDK Global, Inc. CDK has an Earnings ESP of +0.24% and a Zacks Rank #3.

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