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Cisco turns weak on poor Q4 2017 outlook

Last Wednesday, the San Jose, California-based Cisco Systems Inc. (NASDAQ: CSCO) reported higher than expected fiscal 2017 third-quarter revenue and earnings. However, the company presented gloomy Q4 revenue and earnings estimate. That pushed the stock down by about 5% to $33.80. Considering the layoffs, intense competition, and a customers’ shift to remote data centers, we anticipate the stock to decline further in the week ahead.

Cisco reported Q3 2017 revenues of $11.94 billion, compared with $12 billion in Q3 2016, but greater than analysts’ estimates of $11.89 billion. Product revenue increased $10 million y-o-y to $8.885 billion. On the contrary, Service revenue declined $70 million y-o-y to $3.055 billion.

During the quarter ended April 2017, the net income was $2.515 billion, or $0.50 per share, compared to $2.349 billion, or $0.46 per share, in April 2016.

Cisco

Excluding restructuring and impairment costs, share-based compensation expenses, and amortization of intangible assets, among others, the Q3 2017 non-GAAP net income increased to $3.026 billion, or $0.60 per share, from $2.880 billion, or $0.57 per share, in the same period last year. The reported figures were higher than $0.58 per share anticipated by the Wall Street analysts.

Notably, public sector business, which includes orders from federal, state, and local government, declined 4% in the third-quarter of 2017.

Considering the headwinds faced by the company, an extended restructuring plan that would result in the termination of 1,100 employees was announced. This is in addition to the 5,500 layoffs announced in August last year. In this regard, Cisco expects to record an additional pre-tax charge of $150 million in the current quarter. The company expects the restructuring plan to be largely complete at the end of fiscal 2018 first-quarter.

Cash and cash equivalents at the end of April, 2017 was $8.12 billion, down from $8.895 billion in the corresponding quarter a year ago.

Cisco expects Q4 revenues to decline by 4% to 6% on y-o-y basis. The company also anticipates Q4 non-GAAP earnings of between $0.60 and $0.62 per share. The Street analysts are forecasting the company’s Q4 2017 revenue to decline only 1%. Furthermore, the market is anticipating fourth-quarter earnings of $0.62 per share. Thus, considering the decline in revenue and poor Q4 outlook, we expect the share price to decline further.

The stock has started to descend after failing to cross the major resistance level of 34.w0. The stochastic oscillator is making lower highs. Thus, a trader can expect the correction to continue. The next known support for the stock is at 30.

Cisco Stock Price: May 22nd 2017

Cisco Stock Price: May 22nd 2017

To create a short position in the binary options market, a put option can be bought. The option expiration date should be around June 1st, while the recommended strike price is 32.50.


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