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Can New Offerings & Buyouts Aid Cisco's (CSCO) Q3 Earnings?

Zacks Equity Research

Cisco Systems Inc. CSCO is scheduled to report third-quarter fiscal 2019 earnings on May 15. The company outpaced the Zacks Consensus Estimate for earnings in the trailing four quarters, with an average positive surprise of 2.1%.

Past-Quarter Performance

In the second quarter, the company delivered non-GAAP earnings of 73 cents per share which beat the Zacks Consensus Estimate by a penny. Further, the figure rose 15.9% from the year-ago quarter.

Revenues increased 7% year over year (excluding SPVSS business) to $12.446 billion and marginally surpassed the Zacks Consensus Estimate of $12.401 billion.

Shares of the company have gained 15.2% in a year’s time, outperforming the industry’s rally of 14.4%.

What to Expect in Q3

For third-quarter fiscal 2019, revenues are expected to improve 4-6% from the year-ago quarter.

Non-GAAP earnings are anticipated between 76 cents and 78 cents per share.

The Zacks Consensus Estimate for third-quarter earnings is pegged at 77 cents per share, unchanged for the last 30 days. The Zacks Consensus Estimate for revenues stands at $12.90 billion, suggesting an increase of 3.5% from the year-ago reported figure.

Let's see how things are shaping up prior to this upcoming announcement.

Factors at Play

Strength witnessed in the company’s Security and Applications segments is expected to drive the top line in the-be-reported quarter. Order strength and improving traction of the subscription-based model were other tailwinds.

Infrastructure Platforms is likely to be positively impacted by robust growth across switching, wireless and data center business in the to-be-reported quarter. Switching revenues had witnessed robust growth across campus and data center in the last reported quarter. Adoption of new campus switch, Cat9K and Nexus 9K is likely to be a tailwind in the quarter under review.

Further, wireless revenues are expected to benefit on the back of the company’s Wave 2 offerings and Meraki solution. Robust demand for the HyperFlex data-center solution is expected to drive 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. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.

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

The company recently unveiled AIOps, leveraging AI, ML and automation to offer enhanced customer experiences and higher business performance. We believe synergies from collaborations and investment in product enhancement and product rollout will positively impact the top line in the quarter under review.

Robust demand witnessed by web security, unified threat, network security and advanced threat solutions is likely to impact Security revenues in the upcoming quarterly results.

Cisco’s AI-driven Talos intelligence platform blocks billions of 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 Infrastructure Platforms, Applications and Security are currently pegged at $7.44 billion, $1.56 billion and $653 million, respectively.

Acquisitions: Key Catalysts

The company recently announced its intention to acquire 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.

On Jan 30, 2019, the company announced its plan to acquire Singularity Networks, a privately held network infrastructure analytics company.

Cisco had also successfully closed the acquisition of privately-held Duo Security.  The company also concluded previously announced Burlingame, CA-based July Systems acquisition. 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 in the quarter under review.

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 #2 and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks with Favorable Combination

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

Fujifilm Holdings Corp. FUJIY has an Earnings ESP of +20.55% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Synopsys, Inc. SNPS has an Earnings ESP of +1.15% and a Zacks Rank #1.

Agilent Technologies, Inc. A has an Earnings ESP of +2.10% and a Zacks Rank #2.

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