Cisco (CSCO), one of the information technology sector’s bellwethers, will be in focus this week as the networking giant prepares for Wednesday evening’s big report: namely, Cisco earnings for its fiscal fourth quarter.
But first, a look at the expectations:
Wall Street is looking for Cisco earnings per share of 53 cents, a penny higher than the same quarter last year. That earnings growth, combined with Cisco’s strong commitment to cost cutting, could be a boon for margins. Growing sales of high-end hardware products, as well as professional services, will be welcome news as well.
On the downside, however, Cisco’s revenues are expected to decline by more than 2% in the quarter ended June 30, in large part because of slower sales in emerging markets and as the cloud market becomes increasingly crowded — and services have become commoditized.
In the third quarter, Cisco earnings beat on the top and bottom lines: Profits were $2.6 billion (51 cents a share) — 12% lower than a year ago, but beating analysts’ expectations of 48 cents. CSCO reported $11.5 billion in third-quarter revenue — 5.5% below the same quarter last year, but still beating analysts’ EPS estimate of 48 cents.
And yet, the stock surged nearly 7% on the news, perhaps giving us a sense of how CSCO might perform after earnings Wednesday.
For investors, here are three keys to watch for in the upcoming fourth-quarter Cisco earnings release:
- Hot New Technology and Cisco’s Paradigm Shift. While the emergence of any disruptive technology can give shareholders fits in the early stages of deployment, CSCO is wisely positioning itself to cash in on key business opportunities like smart cities, the Internet of Things, software-defined networking and Big Data analytics. The growth in professional services, coupled with the development of high-end products and services to enable mobility and cloud, are positioning Cisco well for the future.
- More Personnel Cuts. Savvy tech companies in sluggish or rapidly changing markets have long known that cutting costs is a powerful weapon to preserve or even grow margins. Case in point: Microsoft’s (MSFT) new CEO Satya Nadella’s announcement of 18,000 layoffs last month. Cisco has viewed job cuts as an integral part of boosting productivity — the company has laid off 12,000 since July 2011 — and more cutbacks could be looming in the near future. Cisco blogger Brad Reese recently reported on rumors that CSCO could lay off up to 20% of its workforce as early as Oct. 1; he also says CSCO’s data center senior vice president, David Yen, could be moving on as well. While lower labor costs can generate a short-term benefit in margins stock boost, workforce reductions only lift a company’s fortunes for the long haul if they are driven by strategic business decisions. If CSCO can continue to trim fat without damaging the muscle and bone it needs to compete in hot sectors like the Internet of Things, cloud and unified communications, CSCO stock should benefit.
- John Chambers’ Rumored Exit. The rumor mill is an integral part of tech companies’ DNA and Cisco is no exception. The tech sector has been rife with speculation that Chairman and CEO John Chambers, who has led CSCO to monster growth and boosted shareholder value dramatically, could be retiring within months. It makes sense that rumors about Chambers’ exit could spook investors. Chambers turns 65 later this month, has been at the helm for two decades, and CSCO stock has skyrocketed by more than 1,200% on his watch. Inevitably, all good things come to an end, but CSCO has a deep bench of insiders to keep the company moving forward after Chambers steps back. Conventional wisdom suggests Cisco will give the nod to Rob Lloyd, president of global sales and development, but I wouldn’t be surprised to see the tech giant tap Padmasree Warrior, chief technology and strategy officer, for the top job. An engineer by training, Warrior has had a dramatic impact on Cisco over the past five years — particularly in the all-important areas of technology innovation and acquisitions.
If Chambers does announce his retirement over the next month, investors can expect CSCO stock to retreat by 5% to 10% in the short term regardless of which executive takes over.
But that does not damage the underlying value proposition of CSCO stock.
I think CSCO stock is a buy now thanks to Chambers’ good job of keeping Cisco on the right track. Should he announce his retirement this week, I would expect the news to cast a long shadow over the rest of the earnings news. However, CSCO stock has solid fundamentals and good value prospects, including a forward P/E of 11.6 — comparable to sector rivals like Oracle (ORCL) and Juniper Networks (JNPR), and less than Microsoft’s (MSFT) 13.5. Meanwhile, CSCO’s 3.1% current dividend yield is one of the highest in the Nasdaq and should provide some semblance of stability to shares should Chambers duck out.
Information technology is a tough business because it is by nature disruptive — market leaders regularly must reinvent themselves to stay in the game, let alone dominate the “Next Big Thing.” Cisco is capable of that, and it looks attractive to buy and hold now ahead of earnings — particularly if Cisco earnings beat and the stock bounces.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.