Cisco Systems Inc. (CSCO - Free Report) is set to release first-quarter fiscal 2018 earnings on Nov 15.
We note that the company beat the Zacks Consensus Estimate in three of the trailing four quarters with an average positive surprise of 2.16%. Notably, earnings were in line with the consensus estimate in the prior quarter.
However, Cisco missed the Zacks Consensus Estimate for revenues in three of the trailing four quarters. Moreover, growth remains elusive as revenues declined on a year-over-year basis in the last three quarters.
For first-quarter fiscal 2018, revenues are expected to decline in the range of 3-1% on a year-over-year basis. Gross margin is expected in the range of 63-64%, while operating margin is anticipated between 29.5% and 30.5% for the quarter. Non-GAAP earnings are anticipated in the range 59-61 cents per share.
In the quarter under review, Cisco will realign reporting segments into five distinct categories — Infrastructure Platforms (57.4% of total revenues in the last quarter), Applications (10%), Security (4.6%), Other Products (2.3%) and Services (25.6%).
Cisco’s stock has returned 12.5% year to date, outperforming the 11.1% rally of the industry.
Let’s see how things are shaping up for this announcement.
Intense Competition Hurts Infrastructure Platforms
Infrastructure Platforms comprise switching, NGN routing, Wireless and Data Center. Notably, competition from several smaller players including Arista Networks (ANET - Free Report) is hurting top-line growth in the switching and routing businesses. Moreover, ongoing transition to subscription-based model is another concern.
Nevertheless, we expect Cisco to deliver stellar performance in the Data Center segment. The completion of the Springpath acquisition during the quarter is likely to fortify the company’s position in the hyperconverged infrastructure system (HCI), where Nutanix Inc. (NTNX - Free Report) is a dominant player.
AppDynamics to Boost Analytics Growth
Applications consist of Collaboration and Other Products (IoT and Analytics). Analytics sub-segment includes product revenues from AppDynamics.
We believe that the addition of AppDynamics (acquired in March) is likely to drive the top line in the soon-to-be-reported quarter.
Security Segment: Key Catalyst
Cisco’s expanding footprint in the rapidly-growing security market bodes well. The company’s security solutions continue to add customers.
In the last quarter, Cisco reported double-digit order growth and 49% deferred revenue growth for the segment. The next-generation firewall portfolio added 6K new customers in the quarter. Total customer base touched almost 80K at the end of the quarter.
The Zacks Consensus Estimate for the Security segment revenues is currently pegged at $574 million.
Slowing Service Provider Order Growth to Hurt Top-line
The realigned Other Products segment contains service provider video, cloud and system management and various emerging technology offerings.
We expect slow order growth from service providers to pose challenge for the company’s top-line growth.
Collaborations to Drive Growth
Cisco’s extended partnerships with the likes of Apple Inc., International Business Machines Corporation and Microsoft Corporation are likely boost growth, particularly in the cloud and IoT.
During the quarter, Viacom Inc. inked a partnership with Cisco to develop an enhanced video distribution network foundation. The alliance will enable Viacom and its affiliates to leverage the advanced features of Cisco D9800 Network Transport Receiver and realize greater efficiencies on content reception and distribution.
Why a Likely Positive Surprise?
Our proven model shows that Cisco is likely to beat earnings due to the favorable combination of a Zacks Rank #3 (Hold) and +0.28% Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a higher chance of beating earnings estimates. You can see the complete list of today’s Zacks #1 Rank stocks here.
Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
Stock to Consider
Here is a company that you may want to consider, as our model shows that it has the right combination of elements to post an earnings beat:
Micron Technology Inc. (MU - Free Report) has an Earnings ESP of +2.28% and sports a Zacks Rank #1.
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