Cisco Systems, Inc. (NASDAQ:CSCO) is expected to report January quarter earnings on Feb.12 after the market close. The networking gear maker will host a conference call to discuss the results on the same day at 1.30 PM pacific time (4.30 PM eastern time).
San Jose, California-based Cisco, a Dow component, is one of the world's leading manufacturers of computer networking equipment. The company is viewed as a technology-industry bellwether due to its global reach and sensitivity to business and government spending cycles.
Wall Street, on average, expects Cisco to earn 46 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies a drop of 9.8 percent from 51 cents a share earned in the same quarter last year. Cisco sees quarterly EPS of 45-47 cents.
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For the past four quarters, Cisco's earnings have topped Street view, with upside surprise of 2 to 6.3 percent. This indicates that the company is executing well despite a tough macro environment curtailing IT spending. However, the consensus estimate has declined by 6 cents in the last three months.
Quarterly revenue is expected to fall 8.9 percent to $11.04 billion from $12.10 billion a year-ago. In the past four quarters, the average revenue growth has been in mid-single digits. The company projects revenue of $10.885 billion to $11.125 billion.
Cisco has set unusually low expectations for the current quarter prompted mostly by very weak order trends in emerging markets. Cisco likes to say that it is early to notice trends, and the emerging market weakness is no exception.
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BMO Capital Markets analyst Tim Long suspects order trends in many of these markets remained weak throughout the quarter; however, he still expects Cisco to exceed expectations in the current quarter on strong enterprise spending in the US and the slow/steady recovery in Western Europe.
Cisco's current quarter guidance assumes about a $1.35 billion shortfall in sales versus normal second quarter seasonality, after backing out the impact from the SourceFire acquisition. Assuming emerging markets represented 20 percent of product sales in the first quarter, a 20 percent sequential decline would amount to roughly $400 million.
There are other factors that affected the weak guidance, including the emerging market effect on services, continued weakness in set-top box orders, weaker order trends from service providers, and a pause in switching sales related to the introduction of the Nexus 9000 platform (formerly Insieme), as well as other product transitions.
Cisco was one of the first companies to highlight the slowdown in emerging markets, and these issues have only grown more pronounced in recent weeks on news of slowing growth and rapid currency inflation in many of these markets. Emerging markets account for 20 percent of product sales for Cisco.
Cisco has set low long-term expectations for its switching and routing business, forecasting growth of 0-1 percent over the next three to five years. This compares to Dell'Oro's forecast of a 3 percent CAGR for switching and a 5 percent CAGR in SP routing through 2018, implying significant share loss for Cisco.
Long expects Cisco's second quarter switch revenue to decline 9 percent sequentially and expect NGN routing to decline 18 percent sequentially.
Cisco's Nexus switches for the data center have been a bright spot and have benefited from pull-through on strong UCS sales. Investors may want color on traction of Nexus 9000 platform.
The company's emerging market weakness will be most pronounced on its router sales. Cisco has also seen a delay in orders as customers evaluate the NCS platform and the CRS-X core router.
The market would look for sales from Federal unit, which accounts for about 6 percent of the company sales. Long believes that Cisco's quarter should not have been affected by the government shutdown as it occurred at the tail end of Cisco's first quarter.
With a budget deal now in place, federal spending may recover, though the business will probably meaningfully pick up only after the debt ceiling issue is dealt with and the overhang is removed.
Data center unit to be one of the few to emerge relatively unscathed from the emerging market weakness as its exposure is limited in those regions. The segment could report more than 12 percent revenue growth. Data center, along with security and wireless, are the only segments that may witness growth in 2014.
Gross margins remain an key metric for Cisco investors, and the company has also made a lot of headway into value engineering efforts to lift margins. Gross margins have improved for Cisco and may see further improvements going forward. The company estimates gross margin of 61 to 62 percent for the second quarter.
Long models some upside as the geographic mix should be favorable given the emerging market weakness offset somewhat by a less favorable product mix (less routing/switching and more data center). He expects opex to decline, but operating margins are expected to take a hit given the lower revenue base.
Given Cisco's new and lower 3-6 percent long-term revenue growth target and the weaker near-term outlook, investors may look for any signs of additional cost cutting efforts.
On the outlook front, the company could continue to guide conservatively, particularly as the emerging market outlook remains weak. Investors may expect a dividend hike from the current 17 cents a share. A 3 cent raise to 20 cents would represent a yield of roughly 3.7 percent, which should provide a decent floor for the shares.
Cisco shares, which trade at 12 times its forward earnings, have traded between $19.98 and $26.49 during the past 52-weeks.
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