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Why Is Cisco (CSCO) Up 9% Since Last Earnings Report?

Zacks Equity Research
Merck (MRK) closed the most recent trading day at $81.59, moving +0.78% from the previous trading session.

A month has gone by since the last earnings report for Cisco Systems (CSCO). Shares have added about 9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cisco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Cisco Systems Tops Q2 Earnings & Revenue Estimates

Cisco Systems delivered second-quarter fiscal 2019 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. Acquisitions contributed 140 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.

Notably, during the second quarter of fiscal 2019 the company completed the divestiture of its Service Provider Video Software Solutions (“SPVSS”) business.

Top-line Details

Products (74.5% of total revenues) advanced 9% to $9.27 billion.

Services (25.5%) increased 1% to $3.17 billion. This was driven by growth in software and solutions services.

Revenues from subscriptions represent 65% of the company’s software revenues, up 10 points year over year.

Deferred product revenues were $6 billion, down 23.1% from the year-ago quarter. Deferred service revenues were $11.2 billion, up 2.6% from the year-ago quarter.

Geographically, Americas, EMEA and APJC reported revenue growth of 7%, 8% and 5% on a year-over-year basis, respectively. Total emerging markets grew 6% and the BRICs plus Mexico climbed 2%.

In terms of customer segments, enterprise increased 11%, while service provider was down 1%. Further, commercial and public sector rose 7% and 18%, respectively.

Total product orders increased 8%. Cisco has realigned Product segments into four distinct categories — infrastructure platform, applications, security, and other.

Wireless, Switching Aids Growth

Infrastructure Platforms (57.3% of second-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues grew 6% from the year-ago quarter to $7.13 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.

Moreover, results benefited from persistent customer shift from 100G to 400G architectures. Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.

AppDynamics Drive Growth

Applications (11.8% of second-quarter revenues) consist of Collaboration portfolio of Unified Communications (“UC”), Conferencing and TelePresence, Internet of Things (“IoT”) and application software businesses such as AppDynamics and Jasper. Revenues increased 24% from the year-ago quarter to $1.46 billion.

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

Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.

Cisco recently unveiled AIOps, leveraging artificial intelligence (AI) machine learning and automation to offer enhanced customer experiences and higher business performance.

Security Remains Strong

Security (5.3% of revenues) climbed 18% to $658 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 billions of threats per day. The company is striving to leverage machine-learning to deploy security platforms in order to mitigate online risks on a real-time basis.

Other Products

Other Products segment contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 59% to $22 million.

Acquisition: A Key Catalyst

Cisco inked a deal to buy Luxtera for approximately $660 million in cash. Cisco intends to deploy Luxtera’s integrated optics technology capabilities across its robust network portfolio featuring capacities ranging from 100GbE (Gigabit Ethernet) to 400GbE. This will enable Cisco to provide ultra-high, data-heavy bandwidth services to CSPs and network service providers.

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

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

Cisco 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. 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.

Operating Details

Non-GAAP gross margin contracted 100 bps from the year-ago quarter to 64.1%. On a non-GAAP basis, product gross margin and service gross margin came in at 62.8% and 67.7%, compared with 63.8% and 68.7% reported in the year-ago quarter, respectively.

Non-GAAP operating expenses came in at $4 billion during the reported quarter, up 3% year over year.  As a percentage of revenues, operating expenses contracted 110 bps to 31.9%.

Non-GAAP operating margin were flat year over year and came in at 32.1%.

Balance Sheet and Cash Flow

Cisco exited the second quarter with cash & cash equivalents and investments balance of almost $40.38 billion down from $42.59 billion in the prior-year quarter. Total debt (short plus long) came in at $25.63 billion compared with $25.56 billion reported in the previous quarter.

The company generated $3.8 billion cash flow from operations during the quarter.

In the second quarter, Cisco returned 6.5 billion shares to shareholders in form of share repurchase and dividend. The company also announced an additional $15 billion to its current share repurchase program.

Furthermore, the company declared a quarterly dividend of 35 cents per share (up 6% from the previous quarter).

Guidance

For third-quarter fiscal 2019, revenues are expected to grow 4-6% on a year-over-year basis.

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

Non-GAAP gross margin is expected in the range of 64-65%, while operating margin is anticipated between 31% and 32% for the quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Cisco has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Cisco has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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