Cisco Earnings Preview: Limited Growth Expected In Core Product Sales

Networking giant Cisco (NASDAQ:CSCO) is scheduled to announce its Q4 and full fiscal year 2017 earnings on Wednesday, August 16. ^[1] The company has reported a decline in net revenues over the last couple of years, driven by stagnating product sales. Through the first three quarters of the fiscal year, Cisco’s major revenue streams – including network switches and routers – witnessed a similar trend. Comparatively, Cisco has witnessed growth in its services revenues and other fast-growing revenue streams, such as wireless products and network security.

We have a $33 price estimate for Cisco’s stock, which is in line with the current market price.

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Guidance For Fourth Quarter

Cisco’s management gave conservative guidance for the fourth fiscal quarter, with revenues expected to fall by around 5% to $12.2 billion. Among the product divisions, routing and switching revenues are likely to continue to witness limited growth while the data center products and collaboration segments – combined with Cisco’s strength in cloud capabilities, network security, IoT, Software-as-a-Service (SaaS) and analytics – could help drive revenues. Cisco expects non-GAAP gross margin to be around 63.5% for the quarter, which is over a percentage point lower than the fourth quarter of FY 2016. Similarly, its operating profit margin (non-GAAP) is expected to be around 140 basis points lower than the year-ago period at 30%. Resulting non-GAAP diluted earnings per share is expected to be around 3% lower on a y-o-y basis to 61 cents a share.

Key Trends In FY 2017

Through the course of its fiscal 2017, Cisco has reported a 2% decline in net revenues to just under $36 billion. Combined revenues generated from sales of routing products and network switches through the first three quarters of the year were down by around 3% over the comparable prior year period. In addition, revenues generated from collaboration and data center products also fell on a y-o-y basis, as shown below.

On the other hand, Cisco reported positive trends from its network security solutions and wireless products segments. Cisco also acquired cloud security firm CloudLock with the intent to further improve its presence in this domain. Similarly, a robust demand for wireless products is attributable to a refreshed product line for the 11ac Wave 2 products and strong performance of Meraki products. This was similar to the strong growth reported by Cisco for these segments in previous years as well.

Cisco’s services have grown at a consistent pace over the years due to the increasing mix of service and subscription-based solutions on offer. Post-sales services and subscription-based revenues are more beneficial to Cisco since they are annually recurring revenues, compared to the lumpy demand caused by product life cycles extending for multiple years.

Despite lower revenues, Cisco has reported an improvement inmargins through the year. This was complemented by a limited increase in operating expenses leading to a percentage point improvement in operating margin, as shown above. Consequently, Cisco’s net income and earnings per share were up by 2-3% for the three quarters combined.

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1. Cisco Schedules Conference Call for Q4 Fiscal Year 2017 Financial Results, Cisco Press Release, August 2017 [↩]