Cisco
Cisco Systems Inc. earnings are dependent upon how fast businesses are transitioning to the company’s new line of network switching products and the lucrative new software contracts that are connected to them, analysts say.
Cisco is scheduled to report fiscal third-quarter earnings on Wednesday after the close of trading.
In the spotlight will be sales of the company’s Catalyst 9000 line of network switches, which seek to gain traction with businesses that are increasing their capital infrastructure spending, along with the multiyear software contracts required to operate the switches.
“For the first time, customers of the new Catalyst 9000 enterprise/campus switches need to select an accompanying software subscription (DNA Essentials, DNA Advantage, Cisco ONE Advantage) with 3-, 5-, or 7-year terms,” said Raymond James analyst Simon Leopold, who has an outperform rating and a $50 target price, in a research note. “We see this as evidence of the gradual evolution of Cisco becoming a more software-centric company.”
Analysts surveyed by FactSet expect product revenue to rise 3.5% to $9.2 billion. Of that, analysts expect $7.15 billion in infrastructure platform revenue, $1.25 billion in applications revenue, $573.3 million in security revenue and $256.6 million in sales of “other products.”
Service revenue is expected to rise 5.5% to $3.22 billion from a year ago. Of that, analysts expect $1.13 billion in collaboration revenue, $836 million in data-center revenue and $759 million in wireless revenue for the quarter.
Earnings: Of the 28 analysts surveyed by FactSet, Cisco on average is expected to post adjusted earnings of 65 cents a share, up from 60 cents a share in the same period a year ago. The average estimate has increased from 62 cents a share at the beginning of the quarter. Cisco forecast 64 cents to 66 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 66 cents a share.
Revenue: Wall Street expects revenue of $12.43 billion from Cisco, according to 25 analysts polled by FactSet. That’s up from $11.94 billion last year, and the $12.1 billion forecast at the beginning of the quarter. Cisco predicted revenue of $12.3 billion to $12.54 billion. Estimize expects revenue of $12.47 billion.
Stock movement: Cisco shares have advanced 8.1% since the company last reported earnings, compared with a less than 0.1% rise in the Dow Jones Industrial Average over the same period. In its last earnings report, shares rallied to post-2000 highs after the company returned to revenue growth for the first time in six quarters, and more than half the analysts who cover the stock hiked their price targets.
What analysts are saying: Deutsche Bank analyst Vijay Bhagavath, who has a buy rating and a $55 price target, expects results and outlook to beat the consensus and said the stock is trading at a discount to its peers. Bhagavath noted:
| Our incrementally positive view is based on strength we note in the Cat 9K Switching refresh cycle, Software Subscriptions Portfolio, and in Optical Networking (partly offsetting softness in Telco Routing) |
Morgan Stanley analyst James Faucette, who has an overweight rating and a $50 price target, also sees Catalyst 9000 sales as being key to earnings. He notes:
| Cat9K continues to exceed expectations, and activity appears to be accelerating. Following our March check in, we saw continued strength through the month of April. Most encouraging, resellers are reporting accelerated sales growth as better availability of the Cat9k timed well with the typical seasonal pick up in enterprise spend. |
Faucette said resellers “are also seeing strong activity in Cisco’s security sales, and while growth rates are similar to that reported in previous quarters, we were encouraged to hear that products outside of firewalls (AMP, Umbrella, and other products acquired by Cisco in recent years) are increasingly contributing to results.”
RBC Capital Markets analyst Mitch Steves, who has a outperform rating and a $50 price target, also sees solid results for the quarter “given that [value-added reseller]s and channel checks show positive trends for the Catalyst 9000.”
Of the 32 analysts who cover Cisco, 23 have buy or overweight ratings and nine have hold ratings, with an average price target of $45.27, or 0.5% lower than Tuesday’s close.