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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.

Cisco Stock Price: November 28th 2017

Cisco Stock Price: November 28th 2017

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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