Cisco Systems, Inc. FQ4 2017 Earnings Preview: Federal Spending In Focus

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Cisco Systems FQ4 2017 earnings are set for release on Wednesday after closing bell, and analysts are expecting non-GAAP earnings of 61 cents per share on $12.07 billion in revenue. With the company’s last earnings report in May, management guided for 60 cents to 62 cents per share in non-GAAP earnings on $11.88 billion to $12.13 billion in sales.

In last year’s fourth fiscal quarter, Cisco Systems reported non-GAAP earnings of 63 cents per share on $12.64 billion in revenue.

Cisco Systems FQ4 2017 earnings

In a note dated Aug. 14, KeyBanc analyst Alex Kurtz highlighted some key areas of focus for Cisco Systems FQ4 2017 earnings. Switching sales have long been an important area for the company, and he’s looking for $3.6 billion in Switching revenues. The company recently revealed new Catalyst switching products during Cisco Live, which he feels will drive a 1.7% increase in Switching sales in fiscal 2018, although consensus is close to 0% growth.

He will also be looking at gross margins, and he’s estimating 63.6%, which is just below the consensus at 64%. He noted that Cisco is just starting to transition its customer base to buying software subscriptions with their hardware rather than a one-time license. He noted that deferred and recurring revenue will also impact the company’s results during this transition.

Deutsche Bank analyst Vijay Bhagavath said in a note earlier this month that U.S. enterprise demand for Cisco’s new Catalyst 9000 Campus Switch and Intent-based Software, 100G Nexus Data Center Switching and next-gen security products looked stronger than he had expected. He also found in his channel checks double-digit order momentum for the company’s Analytics, Automation, Internet of Things, and Cloud-based Network Management products.

However, he said that internationally, IT spending remained weak in the U.K., Germany, the Middle East, and Emerging Markets.

Government spending in Cisco Systems FQ4 2017 earnings

Government technology spending is expected to again be a key focus of the company’s results. When issuing guidance for the fourth fiscal quarter, the company said about one percentage point of its outlook for sales to fall by 4% to 6% was due to uncertainty about federal spending. President Trump said he would cut spending, and even now, lawmakers have yet to finalize the federal budget. That leaves in place the uncertainty that hit Cisco’s third-quarter results.

Kurtz called attention to federal spending as a key area of focus for Cisco Systems FQ4 2017 earnings. He spoke with value-added resellers and vendors who rely on federal spending and found that the budget timing has changed due to the transition to the new presidential administration, which has updated the government’s priorities.

On the other hand, Bhagavath said earlier this month that order trends from the U.S. public sector and especially federal IT spending were improving, citing his own research from the Enterprise, Cloud, and Service Provider IT Channel.

October-quarter guidance

For the October quarter, consensus currently stands at $12.06 billion in sales and non-GAAP earnings of 60 cents per share. Kurtz noted that although the fourth fiscal quarter hasn’t historically been a big one for federal spending, this factor will likely have an impact on management’s October-quarter outlook.

The day before Cisco Systems FQ4 2017 earnings are set for release, the company’s stock ticked higher, rising by as much as 0.57% to $32.02 during regular trading hours.

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