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Cisco (CSCO) to Report Q3 Earnings: What's in the Offing?

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Cisco Systems Inc. (CSCO - Free Report) is scheduled to report third-quarter fiscal 2018 earnings on May 16. The company outpaced the Zacks Consensus Estimate for earnings in three of the trailing four quarters, while matching the estimate once. This resulted in an average positive surprise of 2.98%.

In the second quarter, the company delivered non-GAAP earnings of 63 cents per share, beating the Zacks Consensus Estimate by 4 cents. Furthermore, the figure increased 10.5% on a year-over-year basis.

The top line also increased 3% year over year to $11.89 billion and marginally surpassed the Zacks Consensus Estimate of $11.82 billion.

In third-quarter fiscal 2018, revenues are projected to increase 3-5% on a year-over-year basis. The Zacks Consensus Estimate for revenues is pegged at $12.42 billion, representing growth of 4% from the year-ago quarter, which is in line with the mid-point of the expected growth range.

Non-GAAP earnings are expected between 64 cents and 66 cents per share. The Zacks Consensus Estimate for earnings is pegged at 65 cents, in line with the mid-point of the management’s projected range, translating to year-over-year growth of 8.3%.

Let's discuss the factors likely to influence third-quarter results.

Collaborations to Boost Digitization

Cisco collaborated with UAE-based telecom company `du` and signed a MoU with the Government of Portugal to accelerate digitization.

The company teamed up with Teradata (TDC - Free Report) to leverage on IoT with a view to digitally transforms cities. Integration of Cisco’s Kinetic IoT data platform with Teradata Analytics Platform enhances support for public safety and will aid in creating smart city framework. The company also

Notably, at the Mobile World Congress (“MWC”) 2018, Cisco partnered with government and telecoms, like Reliance Jio, Telenor, SFR (a subsidiary of Altice), Airtel, TIM, Vodafone and Saudi Telecom Company to digitize and build advanced and 5G capable networks.

At MWC, Cisco announced plan to form a multi-vendor ecosystem to accelerate adoption and viability of Open vRAN solutions. The company announced 5G Now portfolio to aid global service providers and consequently mobile operator customers worldwide by advancing their 5G plans.

We can conclude that during the quarter, Cisco innovatively capitalized on digitization opportunities. The new collaborations are likely to boost top-line growth in the to-be-reported quarter.

Adoption of Expanding Networking Portfolio

During the quarter, Cisco was selected by NBC Olympics as a provider of IP video and networking solution for the XXIII Olympic Winter Games.

In order to simplify network architecture, Cisco collaborated with Verizon to accelerate adoption of Hybrid Information-Centric Networking (“ICN”).

Cisco introduced its new Cisco Crosswork Network Automation software portfolio, which will improve the efficiency of its large-scale networks. The company unveiled NCS 1004 and NCS 1010 modular platforms to aid providers leverage their fiber investment by enhancing automation capabilities.

The company also introduced Cisco SD-WAN vAnalytics and Cisco Meraki Insight to bring visibility to wide-area network (“WAN”).The new products are likely to strengthen the company’s networking capabilities.

Focus on Enhancing Cloud Offerings

During the quarter, Cisco announced enhancement of its HyperFlex platform with the 3.0 software release allowing for dynamic deployment and management capabilities of its cloud services.

Container Platform, a new production-grade software for the management of Containerized applications across the cloud environment, was also introduced.

We expect Cisco to deliver robust performance in the Cloud services segment. The completion of Broadsoft’s acquisition during the quarter is likely to strengthen Cisco’s cloud strategy portfolio, helping it to achieve a leadership position in the segment.

Significant Developments in Security Segment

Cisco’s efforts on expanding footprint in the rapidly-growing security market bode well. During the quarter, the company collaborated with Rackspace to deliver its customers protection against evolving sophisticated threats such that their multicloud journey is secured. The company also collaborated with the likes of Apple, Aon and Allianz to introduce a new cyber risk management solution for businesses.

In the last quarter, Cisco reported 38% deferred revenue growth for the segment driven by solid demand for unified threat, advanced threat and web security solutions. The Zacks Consensus Estimate for the Security segment revenues is pegged at $578 million, representing year-over-year growth of 9.7%.

Competition to Limit Infrastructure Platforms Growth

Infrastructure Platforms comprise switching, NGN routing, Wireless and Data Center. Notably, competition from several smaller players including Arista Networks (ANET - Free Report) is impacting top-line growth in the switching and routing businesses.

Arista’s recent intention of manufacturing switches that connect campus networks is likely to hurt Cisco as it holds a dominant position in that market. Moreover, the ongoing transition to subscription-based model remains a concern.

What Does the Zacks Model Unveil?

Our proven model shows that a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The Sell-rated stocks (4 or 5) are best avoided, especially when the company is seeing negative estimate revisions.

Cisco has a Zacks Rank #2 but an Earnings ESP of -0.22%, which makes surprise prediction difficult.

Stock with Favorable Combination

NetApp, Inc. (NTAP - Free Report) , from the broader technology sector, is a stock you may want to consider as our proven model shows that it has the right combination of elements to post an earnings beat this quarter.

NetApp has an Earnings ESP of +0.20% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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