Cisco tops Q1 2018 EPS estimates, issues strong Q2 EPS view

Networking hardware manufacturer Cisco Systems, Inc. (NASDAQ: CSCO) surprised the market on November 16 by reporting an impressive fiscal 2018 first-quarter earnings that exceeded analysts’ estimates. The quarterly revenues were in line with the Zacks Consensus estimates. Cisco also issued an impressive second-quarter guidance.

Following the results, the stock was lifted to a new 12-month high of $36.97. We anticipate the rally to continue in the days ahead due to reasons given below.

The San Jose, California-based Cisco reported a GAAP net income of $2.4 billion, or $0.48 per share, on revenues of $12.1 billion in the first-quarter of fiscal 2018.

In the same quarter of fiscal 2017, the company reported a GAAP net income of $2.3 billion, or $0.46 per share, on revenues of $12.40 billion. The Street analysts had expected Cisco to report revenues of $12.11 billion.

Cisco

Excluding charges, Q1 2018 non-GAAP net income was flat at $3 billion, or $0.61 per share, compared with $3.1 billion, or $0.61 per share, in Q1 2017, but higher than Zacks Consensus estimates of $0.60 per share. The acquisitions made by Cisco impacted earnings negatively by a penny in the quarter.

Segment wise, Product revenue declined to $9.054 billion in the three months ended October 28, from $9.302 billion reported in the same period last year. Product segment is further divided into four business units, namely, Infrastructure Platforms, Applications, Security, and Other Products.

• Infrastructure Platform, which includes NGN routing, Switching, Wireless and Data Center solutions reported revenues of $6.970 billion, down 4% on y-o-y basis.
• Applications revenue – $1.203 billion, up 6% y-o-y
• Security revenue – $585 million, an increase of 8% on y-o-y basis.
• Other products – $296 million, down 16% y-o-y.

Service revenue increased to $3.082 billion, from $3.050 billion in the year-ago period. Almost 32% of the revenues were recurring in nature. Notably, revenues from subscriptions represent 52% of the company’s software revenues, an increase from 18% in the year-ago period. The company acknowledged that on-going transition to subscription-based business will result in a slowdown in the near-term future. However, the management is confident that the transition will ultimately prove fruitful for the company.

Non-GAAP gross margin contracted 150 bps from the prior year period to 63.7%, mainly due to a 180bps decrease in the product margin. At the end of October 2017 quarter, Cisco had cash & cash equivalents of almost $71.60 billion. The company acquired Springpath, Viptela, and Observable networks during the quarter. Cisco also announced the acquisition of Perspica, a provider of machine learning and data processing technology. The company has also stated its intention to acquire BroadSoft for $1.90 billion.

As far as product launches are concerned, the company unveiled Cisco Intersight, its management and automation platform. The company also launched a portfolio of subscription offers, referred to as Business Critical and High Value Services, which uses AI to forecast future IT failures.

For fiscal 2018 second-quarter, Cisco expects revenues to increase 1% to 3% on a y-o-y basis. The company also anticipates non-GAAP earnings of between $0.58 and $0.60 per share. The Zacks earnings estimate is currently $0.58 per share on revenues of $11.73 billion for the second-quarter. Thus, a shift to a subscription based model and impressive Q2 outlook is expected to keep the stock bullish in the short-term.

The price chart indicates consolidation at 36 levels. The stochastic oscillator is in the bullish zone. Thus, we can expect the stock to move up higher in the days ahead.

A call option would be ideal to trade the uptrend, under the current scenario. In a case, we decide to go ahead with the trade, a strike price of about $36 would be preferred. Further, we will select an option expiration date around December 7.

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