Cisco Earnings Preview: Software, Services To Drive Top Line Growth

November 15th, 2016 by Trefis Team
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Networking giant Cisco (NASDAQ:CSCO) is scheduled to announce its Q1 fiscal year 2017 earnings on Wednesday, November 16. [1] The company derives a huge chunk of its revenues from selling networking and telecom hardware, with revenues growing at very modest rates over the last couple of years. Comparatively, software solutions and other network security solutions sold by Cisco have performed well in recent years. Moreover, service-based revenues have also grown at a steady pace to offset the stagnating revenues from hardware sales. This trend was evident in the revenues earned across various segment through the quarters ended April and July quarters as shown below.

csco_q1_ep3

Despite limited growth in revenues, the company reduced its operating expenses and consequently improved its operating margin (non-GAAP) through the first half of the year. Additionally, its non-GAAP diluted earnings per share has increased by 6% on a y-o-y basis to $1.20.

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csco_q1_ep2

Product Sales To Remain Stagnant

Low revenues for hardware products could continue to be a challenge for Cisco, as services and software-based products drive revenue growth. Cisco’s strength in cloud capabilities, network security, IoT, Software-as-a-Service (SaaS) and analytics through acquisitions should aid top line growth going forward. The company’s strategy of leveraging security to sell proprietary bundled products has helped it fend off pressure from white label competition to an extent, while preserving gross margins. For the fiscal first quarter (ended October), Cisco gave conservative guidance, with revenues expected to be flat over the comparable year-ago period as shown below. [2] Gross margin could improve slightly while operating margin and net income could witness limited growth.

csco_q1_ep1

We have a $30 price estimate for Cisco, which is roughly in line with the current market price.

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Notes:
  1. Cisco Schedules Conference Call for Q1 Fiscal Year 2017 Financial Results, Cisco Press Release, November 2016 [↩]
  2. Cisco Q4 2016 Earnings Call Transcript, Seeking Alpha, August 2016 [↩]