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Will Cisco Beat Expectations This Quarter?

August 05, 2014 | About:
Eshna Basu

The world’s largest enterprise networking and communications solutions provider Cisco Systems (CSCO) is slated to release its fourth-quarter 2014 results on August 13. The company expects its revenue to fall year over the year. In the third quarter this year, revenue declined year over year and non-GAAP earnings per share (EPS) remained flat. But the results were better than the analysts’ aggregate expectations. Will the company be able to beat estimates once again and see some improvement in the quarter? Let’s zero in.

Revenue

Analysts expect Cisco to record revenue of $12.14 billion, down 2.2% year over year. The analysts’ projection is at par with the company’s expected range of 1%-3% decline. But there’s obviously a silver-lining in the expectation. The fourth-quarter revenue is estimated to reflect an encouraging 4%-6% sequential growth that may soothe investor nerves.

Last quarter, revenue dropped 5.5% year over year owing to challenges faced in the emerging markets (Brazil, Russia, China, Mexico, and India) and lower contribution from the Service Provider customers. Although Service Provider orders dropped 5%, the rate of decline moderated from 12% and 13% declines in the first and second quarters of fiscal year 2014, respectively. The company expects the Service Provider order trend to stabilize in the coming quarters, although it doesn’t predict a growth momentum very soon. It also expects challenges in the emerging markets to continue and impact revenue growth adversely.

Another factor that’s holding back the revenue growth was new product transition in the high-end switching and routing category. Switching revenue in the third quarter declined 6%. The company expects that the product transition will take some time to generate an acceptable contribution. Contribution from high-end routing could continue to be a drag on the result until the completion of product transition. Cisco is also losing in software-defined networking (SDNs) space vis-a-vis its peers, which is a major setback.

Despite the odds, strength in product orders from the U.S. commercial and enterprise arenas could moderate the total revenue decline in the period. Also, the company’s growing security revenues could be of great support. Last quarter, the company announced a new Managed Threat Defense Service which could further boost the demand for its security services that grew 10% during the period.

Margins

Last quarter, gross margin was 62.7%. For the current quarter, Cisco expects non-GAAP gross margins to be in the range of 61% to 62%. The sequential decline of roughly 70-170 basis points in gross margin could be due to pricing pressure.

Non-GAAP operating margin is expected to be in the range of 27.5% to 28.5%, versus 28.1% recorded in the last quarter. The company expects non-GAAP operating expenses to decline during the period on account of lower compensation expense. But continuous investments in cloud and acquisitions could partially offset the effect of lower compensation expense.

Earnings

Analysts expect earnings to grow around 2% year over year to $0.53 per share, which is at the higher end of the company’s expected range of $0.51-$0.53. The year over year improvement suggests a reversal of the trend noticed in the past two consecutive quarters. Non-GAAP earnings remained unchanged in the prior quarter but declined 8% year over year in the second quarter.

However, Cisco expects reported or GAAP EPS to be $0.11-$0.14 lower than the non-GAAP EPS. This should be on account of the pre-tax restructuring charges.

Summing Up

Cisco has been facing challenges for quite sometime, but looks firm for a rebound through investments, innovations and cost management. The company’s exposure in emerging markets is a concern, and so is the slow progress in SDN space. But Cisco could benefit from continuous investments in the cloud, new products and services, and strategic acquisitions.


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