Cisco Systems, Inc. Earnings Preview: Watching Recurring Revenue Mix

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Cisco Systems, Inc. Earnings Preview: Watching Recurring Revenue Mix

Cisco Systems is scheduled to release its next earnings report on Wednesday after closing bell, and the consensus is calling for earnings of 58 cents per share on $11.9 billion in revenue for the third quarter of the company’s fiscal 2017. Management guided for non-GAAP earnings of 57 cents to 59 cents per share on $11.76 billion to $12 billion in revenue.

As far as guidance for Cisco System’s fourth fiscal quarter, Wall Street is looking for $12.5 billion in revenue and earnings of 62 cents per share.

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In the same quarter a year ago, Cisco Systems posted $12 billion in revenue, although the company had one extra week in that quarter. Management assigned $265 million of the year-ago quarter’s revenue and $115 million of its operating income to the extra week, analyst Matthew Robison of Wunderlich said in a note to investors dated May 15.

A broad picture of Cisco Systems’ earnings

Drexel Hamilton analyst Brian White said in his earnings preview note dated May 16 that throughout the first quarter earnings season, supply chain trends for networking and telecom recorded seasonal weakness, but he wasn’t overly concerned.

He expects Cisco Systems to play up the increasing mix of recurring revenue, of which 31% of was recurring in the second quarter. He projects a 6% sequential increase in NGN Routing revenue, flat New Products sales, a 1% sequential increase in Switching revenue, and a 3% increase in Services revenue. Looking year over year, he expects a 3% decline in total product sales as Switching sales fall 3% and Routing rise 2% while Services revenues grow 2%.

White also noted that the company closed its acquisition of AppDynamics on March 22, although management did not include any numbers in their guidance.

Service Provider comps get easier as Enterprise comps get harder

Robison also pointed out that Service Provider order growth was flat in the second quarter of fiscal 2016, and then the year over year decline improved to a 1% decline in the second quarter of fiscal 2017. He added that in the first quarter of fiscal 2017, Service Provider orders fell 12% year over year. As a result, he expects the third quarter to show “flat-to-slightly positive” growth in Service Provider orders due to easier year over year comparisons.

He also believes that the third quarter was the last of four quarters of easy year over year comparisons for Cisco Systems’ Enterprise segment because it was the last quarter with declines in orders. As a result, he’s expecting the company’s Enterprise segment to report “another low-single-digit order growth comparison” versus the year-ago quarter, followed by a bigger challenge for the current quarter. Enterprise orders grew 3% in the fourth quarter of fiscal 2016.

Strength in Cisco’s Security, Cloud, IoT segments

Robison expects Cisco Systems’ Commercial segment to post “OK” results but adds that comparisons for the segment will also begin getting more difficult. He noted that Commercial has been the company’s most consistent segment with order growth in the mid- to high-single digit percentages. Commercial orders grew in the low-single digit percentages in the first half of fiscal 2017. He added that the third quarter of fiscal 2016 brought an 8% increase in Commercial orders, making it the most difficult comparison for this year. He’s expecting flattish Commercial order growth for this year’s third quarter.

The Wunderlich analyst believes that Security sales were strong in the third quarter as they grew 14.3% year over year in the second quarter. He also expects the “Other” segment, which contains the company’s Cloud and Internet of Things assets, to continue posting strong growth, as the segment was up by almost 53% year over year in the second quarter due to strength in Jasper.

Shares of Cisco Systems were little changed on Tuesday as they hovered around $34.23.

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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at [email protected]
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