Cisco Systems (CSCO) jumped three months ago after beating January quarter estimates, issuing better-than-expected April quarter guidance and reporting its closely-watched product orders grew 5% annually. And shares have held onto their gains since.
Can the networking giant deliver an encore performance when it delivers its April quarter report on Wednesday afternoon? Favorable IT spending trends, a well-received switch refresh and (possibly) large buybacks should help its cause, but telecom spending and cloud cannibalization could get in the way.
On average, analysts polled by FactSet expect Cisco to report April quarter revenue of $12.43 billion (up 4% annually) and adjusted EPS of $0.65 (up by $0.05). For the July quarter -- Cisco usually provides quarterly guidance within its report -- the consensus is for revenue of $12.72 billion (up 5% with the help of favorable comps) and adjusted EPS of $0.69 (up by $0.08).
Product revenue is expected to be up by 3.5%, and services revenue by 5.5%. As is the case for other U.S. multinationals, a weak dollar is acting as a tailwind.
What to Watch:
In addition to the aforementioned numbers and Cisco's product orders, here are some other things to keep an eye on as Cisco reports and hosts its earnings call:
Catalyst Switch Momentum - Last June, Cisco unveiled a refresh for its mainstay Catalyst switch line (widely used in campus/office networks). In addition to launching new hardware (the Catalyst 9000 family), it rolled out subscription-based software products (called DNA) that work with the new Catalyst switches to let businesses do things like quickly connect new devices to a network or secure a part of a network.
Last quarter, Cisco reported its customer count for the Catalyst 9000 line more than doubled sequentially to over 3,100. The company is banking on the Catalyst 9000 line and DNA to slow the share gains of rivals such as Huawei and HP Enterprise (HPE) , as well as grow its software sales to those switching clients that stay loyal to it.
IT Spending Commentary - Cisco is far from the only big-name enterprise IT firm to have posted strong earnings this year, as companies benefit from both a weak dollar and loosening enterprise purse strings. Software demand has been stronger than hardware demand, but the latter has benefited some from an Intel (INTC) server CPU upgrade cycle. Any comments that Cisco's management provides about the spending environment it's seeing will be closely watched.
Telecom Capex Pressures - Though its total product orders were up 5% in the January quarter, Cisco's service provider orders -- they cover orders from telcos, pay-TV providers and cloud providers -- fell 5%. Weak capital spending by telecom and cable firms is still clearly a big headwind.
Two weeks ago, Cisco disclosed it's paring its pay-TV exposure by selling its service provider video software business (obtained in 2012 through the $5 billion NDS acquisition) to PE firm Permira for an undisclosed sum. The move comes three years after Cisco sold its set-top business to France's Technicolor for $600 million.
Enterprise Cross-Currents - While Cisco's "commercial" product orders (they involve small and mid-sized businesses) rose 14% in the January quarter, its enterprise orders only rose 3%. Did orders pick up in the April quarter? Healthy IT spending and growing software sales are working in Cisco's favor, but the company is also dealing with stiff competition in a slew of markets and the impact of cloud infrastructure adoption on traditional IT hardware spend.
Deferred Revenue Growth - As its sales of software subscriptions and cloud services have risen, Cisco's deferred product revenue -- product revenue that Cisco has collected, but hasn't yet recognized on its income statement -- has been growing at a healthy clip. With the help of both organic growth and the $3.7 billion AppDynamics acquisition, deferred product revenue rose 19% in the January quarter, with deferred product revenue related to software and subscriptions growing 36%. Expect more of the same for the April quarter.
Security Momentum - Cisco's security revenue rose 6% annually in the January quarter to $558 million, with deferred product revenue rising 38%. Strong IT security spending has been providing a lift, and so have Cisco's aggressive efforts to grow security software and services revenue.
Cloud Deal Commentary - Much like some other big-name IT hardware firms, Cisco has been stung by the reluctance of cloud giants (Google, Facebook, Amazon, etc.) to spend heavily on its gear. Especially since these firms are accounting for a larger and larger share of global IT spend.
CEO Chuck Robbins has repeatedly talked about his efforts to grow Cisco's cloud exposure on earnings call, and highlighted 2017 switching deals (size unknown with Microsoft (MSFT) and Alibaba (BABA) . Any comments pointing to additional cloud traction would be well-received.
The Impact of Buybacks - With tax reform enabling Cisco to repatriate tens of billions in offshore cash, as well as more easily repatriate future offshore profits, the company used its January quarter to announce it's adding $25 billion to its stock buyback program. That raised Cisco's total buyback authorization to $31 billion.
It wouldn't be surprising if April quarter EPS got a boost from heavy buyback activity. Especially since Cisco spent $4 billion on buybacks in the January quarter.