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Cisco (CSCO) Down 2.6% Since Earnings Report: Can It Rebound?
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A month has gone by since the last earnings report for Cisco Systems, Inc. (CSCO - Free Report) . Shares have lost about 2.6% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is CSCO due for a breakout? 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 drivers.
Recent Earnings
Cisco Systems delivered third-quarter fiscal 2018 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 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.
Top-line Details
Products (74.7% of total revenues) increased 4.7% to $9.30 billion.
Services (25.3%) advanced 3.4% to $3.16 billion. This was driven by growth in software and solutions services.
Almost 32% of the revenues were recurring in nature gaining 2% from the year-ago quarter.
Revenues from subscriptions represent 55% of the company’s software revenues.
Recurring software and subscriptions generated $5.6 billion deferred product revenues, which surged 29% from the year-ago quarter.
Geographically, Americas, EMEA and APJC reported revenue growth of 2%, 9% and 7% on a year-over-year basis, respectively. Total emerging markets grew 7% and the BRICs plus Mexico climbed 12%.
In terms of customer segments, enterprise increased 11%, while service provider dropped 4%. However, commercial and public sector rose 7% and 2%, respectively.
Total product orders increased 4%. Cisco has realigned Product segments into four distinct categories — infrastructure platform, applications, security, and other.
Wireless, Switching Witnessed Growth
Infrastructure Platforms (57.5% of third-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues 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.
However, continued weakness in service provider which led a slowdown in enterprise routing business remained a headwind during the quarter.
Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by more than 5,800 customers, up 2,700 sequentially. Moreover, results benefited from the continuing customer shift to 100 gig architectures.
Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.
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.
AppDynamics Drive Growth
Applications (10.5% of third-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 19% from the year-ago quarter to $1.31 billion.
In the quarter, Cisco integrated its Cisco Spark with Webex Platform which enhanced Webex Meeting and enabled it to introduce Webex Teams, further strengthening the company’s collaboration portfolio.
Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.
Security Remains Strong
Security (4.7% of revenues) climbed 11% to $583 million. The results were noticeable as deferred revenues surged 38% from the year-ago quarter.
Strong growth can be attributed to solid demand witnessed by web security, unified threat and advanced threat solutions.
The company is striving to leverage machine-learning to deploy security platforms to mitigate online risks on a real-time basis.
Other Products
Other Products segment (2% of revenues) contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 6% to $249 million.
A positive development pertaining to the sector is the recent divestiture of a portion of company’s previously acquired NDS video assets. This move is likely to mitigate the sluggishness persistent in this segment.
Operating Details
Non-GAAP gross margin contracted 40 bps from the year-ago quarter to 63.9%. Management claims that the decrease can be attribute to higher memory pricing. This is anticipated to persist in the near term.
Non-GAAP operating expenses during the quarter came in at $4.05 billion, up 5.7% year over year. Non-GAAP operating expenses, as percentage of revenues, expanded 40 bps to 32.5%.
As a result, non-GAAP operating margin contracted 80 bps to 31.5%.
Balance Sheet and Cash Flow
Cisco exited the third quarter with cash & cash equivalents and investments balance of almost $54.43 billion down from $67.97 billion in the prior-year quarter. Cash & cash equivalents and investments available in the United States at the end of quarter were $47.5 billion. The company generated $2.42 billion cash flow from operations down from the year-ago figure of $3.3 billion.
In the third quarter, Cisco repurchased approximately 140 million shares of common stock for $6.02 billion, translating to an average price of $42.83 per share. Furthermore, the company paid a cash dividend of 33 cents per share.
Guidance
For fourth-quarter fiscal 2018, revenues are expected to grow 4-6% on a year-over-year basis.
Non-GAAP earnings are anticipated between 68 cents and 70 cents per share.
Non-GAAP gross margin is expected in the range of 63-64%, while operating margin is anticipated between 29.5% and 30.5% for the quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter
At this time, CSCO has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.
Outlook
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, CSCO has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Cisco (CSCO) Down 2.6% Since Earnings Report: Can It Rebound?
A month has gone by since the last earnings report for Cisco Systems, Inc. (CSCO - Free Report) . Shares have lost about 2.6% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is CSCO due for a breakout? 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 drivers.
Recent Earnings
Cisco Systems delivered third-quarter fiscal 2018 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 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.
Top-line Details
Products (74.7% of total revenues) increased 4.7% to $9.30 billion.
Services (25.3%) advanced 3.4% to $3.16 billion. This was driven by growth in software and solutions services.
Almost 32% of the revenues were recurring in nature gaining 2% from the year-ago quarter.
Revenues from subscriptions represent 55% of the company’s software revenues.
Recurring software and subscriptions generated $5.6 billion deferred product revenues, which surged 29% from the year-ago quarter.
Geographically, Americas, EMEA and APJC reported revenue growth of 2%, 9% and 7% on a year-over-year basis, respectively. Total emerging markets grew 7% and the BRICs plus Mexico climbed 12%.
In terms of customer segments, enterprise increased 11%, while service provider dropped 4%. However, commercial and public sector rose 7% and 2%, respectively.
Total product orders increased 4%. Cisco has realigned Product segments into four distinct categories — infrastructure platform, applications, security, and other.
Wireless, Switching Witnessed Growth
Infrastructure Platforms (57.5% of third-quarter revenues) comprise Switching, NGN routing, Wireless and Data Center solutions. Revenues 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.
However, continued weakness in service provider which led a slowdown in enterprise routing business remained a headwind during the quarter.
Management stated that the subscription-based Catalyst 9000 switching platform has been adopted by more than 5,800 customers, up 2,700 sequentially. Moreover, results benefited from the continuing customer shift to 100 gig architectures.
Additionally, rapid adoption of multi-cloud infrastructures was a key catalyst.
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.
AppDynamics Drive Growth
Applications (10.5% of third-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 19% from the year-ago quarter to $1.31 billion.
In the quarter, Cisco integrated its Cisco Spark with Webex Platform which enhanced Webex Meeting and enabled it to introduce Webex Teams, further strengthening the company’s collaboration portfolio.
Collaboration revenues rose primarily driven by growth across AppDynamics, UC infrastructure and TelePresence endpoints.
Security Remains Strong
Security (4.7% of revenues) climbed 11% to $583 million. The results were noticeable as deferred revenues surged 38% from the year-ago quarter.
Strong growth can be attributed to solid demand witnessed by web security, unified threat and advanced threat solutions.
Cisco’s AI-driven Talos intelligence platform blocks 20 billion threats per day.
The company is striving to leverage machine-learning to deploy security platforms to mitigate online risks on a real-time basis.
Other Products
Other Products segment (2% of revenues) contains service provider video, cloud and system management and various emerging technology offerings. Revenues fell 6% to $249 million.
A positive development pertaining to the sector is the recent divestiture of a portion of company’s previously acquired NDS video assets. This move is likely to mitigate the sluggishness persistent in this segment.
Operating Details
Non-GAAP gross margin contracted 40 bps from the year-ago quarter to 63.9%. Management claims that the decrease can be attribute to higher memory pricing. This is anticipated to persist in the near term.
Non-GAAP operating expenses during the quarter came in at $4.05 billion, up 5.7% year over year. Non-GAAP operating expenses, as percentage of revenues, expanded 40 bps to 32.5%.
As a result, non-GAAP operating margin contracted 80 bps to 31.5%.
Balance Sheet and Cash Flow
Cisco exited the third quarter with cash & cash equivalents and investments balance of almost $54.43 billion down from $67.97 billion in the prior-year quarter. Cash & cash equivalents and investments available in the United States at the end of quarter were $47.5 billion. The company generated $2.42 billion cash flow from operations down from the year-ago figure of $3.3 billion.
In the third quarter, Cisco repurchased approximately 140 million shares of common stock for $6.02 billion, translating to an average price of $42.83 per share. Furthermore, the company paid a cash dividend of 33 cents per share.
Guidance
For fourth-quarter fiscal 2018, revenues are expected to grow 4-6% on a year-over-year basis.
Non-GAAP earnings are anticipated between 68 cents and 70 cents per share.
Non-GAAP gross margin is expected in the range of 63-64%, while operating margin is anticipated between 29.5% and 30.5% for the quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter
Cisco Systems, Inc. Price and Consensus
Cisco Systems, Inc. Price and Consensus | Cisco Systems, Inc. Quote
VGM Scores
At this time, CSCO has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.
Outlook
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, CSCO has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.