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What's in the Offing for Cisco Systems' (CSCO) Q4 Earnings?

Zacks Equity Research

Cisco Systems Inc. CSCO is scheduled to report fourth-quarter fiscal 2019 earnings on Aug 14. 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 third quarter, the company delivered non-GAAP earnings of 78 cents per share which beat the Zacks Consensus Estimate by a penny. Further, the figure improved 18.2% from the year-ago quarter.

Revenues increased 6% year over year, excluding Service Provider Video Software Solutions (SPVSS), to $12.958 billion and surpassed the Zacks Consensus Estimate of $12.875 billion. Acquisitions contributed 40 bps to the top line in the third quarter.

Shares of the company have gained 19.8% in a year’s time, outperforming the industry’s rally of 16.6%.


What to Expect in Q4

For fourth-quarter fiscal 2019, revenues are expected to improve 4.5-6.5% on a year-over-year basis. Non-GAAP earnings are anticipated between 80 cents and 82 cents per share.

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 82 cents per share, unchanged for the last seven days. The earnings suggest year-over-year growth of 17.1%. The Zacks Consensus Estimate for revenues stands at $13.39 billion, suggesting an improvement of 4.2% from the year-ago reported figure.

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

Factors to Drive Growth

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

Further, the advancement in areas like IoT, AI, ML and increased cloud applications is likely to aid the upcoming quarterly results.

Infrastructure Platforms is likely to have been 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 have acted as 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. Moreover, customer shift from 100G to 400G architectures are expected to be positive, going forward. This has enabled customers to be more flexible. Additionally, rapid adoption of multi-cloud infrastructures is 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 also recently teamed up with telehealth service provider, American Well, in a bid to bridge the gap between home television sets and doctor’s clinic. We believe Cisco’s strength in networking device manufacturing will aid in bringing the device to the market faster and enhance business prospects. This deal is likely to aid the upcoming quarterly results.

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 is likely to 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.

Acquisitions to Drive Growth

Cisco recently expressed its intention to acquire Acacia Communications, an optical networking technology company, for $2.6 billion in cash and marketable securities. Post the deal closure, Acacia will join Cisco's Optical Systems and Optics group — networking and security business.

With this buyout, Cisco’s customers will be able to experience greater flexibility in operations, enhanced multi-level security, increased awareness and greater administrative control.

In the quarter under review, Cisco concluded the deal to buy Luxtera. Cisco intends to deploy Luxtera’s integrated optics technology capabilities across its robust network portfolio featuring capacities ranging from 100GbE (Gigabit Ethernet) to 400GbE.

Further, the deal will help Cisco add more vital technology to its open-source software in order to build networking machinery.

The company had also announced that it has successfully closed the buyout 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.

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’sextended partnerships with the likes of Aon, Allianz and Rackspace are likely to bolster 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 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. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Currently, Cisco has a Zacks Rank #3 and an Earnings ESP of +0.41%, which makes surprise prediction difficult.

Other Stocks That Warrant a Look

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

Lockheed Martin Corporation LMT has an Earnings ESP of +0.90% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

CACI International, Inc. CACI has an Earnings ESP of +4.02% and a Zacks Rank #2.

Myriad Genetics, Inc. MYGN has an Earnings ESP of +0.71% and a Zacks Rank #3.

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