Cisco Systems Inc. will wrap up its fiscal year with an earnings report that could have investors focusing on the future instead of the results.
Cisco CSCO, +0.00% is scheduled to report fiscal fourth-quarter earnings on Wednesday after the closing bell, but those earnings aren’t what investors have focused on lately. Drawing the spotlight away was Cisco’s recent announcement that it is acquiring Duo Security for $2.35 billion, a move that drew accolades from many analysts
Cowen analyst Paul Silverstein, who has an outperform rating and a $51 price target said in a note that “Duo should further improve Cisco’s security value proposition, shift to intent-based networking and transition to a more multi-cloud-centric, annual subscription, recurring revenue model.”
Piper Jaffray analyst James Fish, who has an overweight rating on Cisco and a $50 price target, noted: “We believe network security providers need to own the identity space, as this is the next ‘platform’ in security.”
Any effects on the security business won’t be felt until next year, however, so Cisco’s forecast for the current fiscal year will likely be parsed more than the numbers it produced in the fourth quarter, when European sales may have come in weak. Oppenheimer analyst Ittai Kidron, who has an outperform rating and a $50 price target on Cisco, expects the July-ending quarter to be “a transitional bump in the road.”
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“Based on our U.S./European channel checks (30 interviews), we expect Cisco to report revenue in line with to potentially slightly below the July-quarter consensus,” Kidron said in a note, citing soft European demand.
“Our view takes into account recent weak service provider Capex trends, background noise (Europe, tariffs, GDPR, etc.), and our enterprise checks which suggest possible softness,” Kidron said. “That said, we’re more positive on the October quarter, where checks point to building order pipelines and some recovery in European demand.”
What to expect
Earnings: Of the 27 analysts surveyed by FactSet, Cisco on average is expected to post adjusted earnings of 69 cents a share. The company forecast earnings of 68 cents to 70 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 70 cents a share.
Revenue: Wall Street expects revenue of $12.77 billion from Cisco, according to 25 analysts polled by FactSet. That’s up slightly from the $12.70 billion forecast at the beginning of the quarter. Cisco predicted revenue of $12.62 billion to $12.86 billion. Estimize expects revenue of $12.78 billion.
Analysts surveyed by FactSet expect product revenue to rise 5.5% to $9.53 billion. Of that, analysts expect $7.28 billion in infrastructure platform revenue, $1.4 billion in applications revenue, $614.8 million in security revenue and $255.9 million in sales of “other products.” Service revenue is expected to rise 3.5% to $3.22 billion from a year ago.
Stock movement: Cisco shares fell after its previous earnings report after services revenue came in light and have yet to recover.
Since its earnings report in mid May, Cisco shares are down 3.1%, while the Dow Jones Industrial Average DJIA, -0.77% , which counts Cisco as a component, is up 2.2%, the S&P 500 index SPX, -0.71% is up 4.1%, and the tech-heavy Nasdaq Composite Index COMP, -0.67% is up 6% in the same period.
What analysts are saying: Of the 29 analysts who cover Cisco, 21 have buy or overweight ratings, eight have hold ratings and no analysts have sell or underweight ratings, with an average price target of $49.26, or nearly 13% above Thursday’s closing price.
Morgan Stanley analyst James Faucette, who has an overweight rating and a $48 price target on Cisco, sees the company’s new line of network switches as a major driver.
“Our reseller contacts saw Cisco outperform primarily on campus and data center switching, followed by security and wireless spend,” Faucette said. “On campus, the Catalyst 9000 continues to drive momentum, and now halfway through the year, resellers are feeling increasingly confident in the CY19 pipeline.”
Cisco’s Catalyst 9000 line of network switches are expected to gain traction with businesses that are increasing their capital infrastructure spending, along with the multiyear software contracts required to operate the switches.
Raymond James analyst Simon Leopold wrote Friday that he was tempted to raise estimates ahead of earnings due to Catalyst 9000, the security business and other strengths, but was held back by “the headwinds from the software pivot, poor visibility, and component shortages.”
“Following three consecutive quarters posting year over year growth, we continue to believe that Cisco’s revenue headwinds, driven by a shift from a perpetual to a subscription based business could be turning the corner, and see potential upside to earnings driven by better revenue growth, healthier margins, and share buybacks,” wrote Leopold, who has an outperform rating and $50 target price on the stock.
Marketwatch staff writer Jeremy C. Owens contributed to this article.
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