Earnings Preview: What to Expect From Cisco Systems

Cisco Systems (NASDAQ:CSCO) stock has been on a slow climb as the company approaches its fiscal fourth quarter and fiscal 2020 earnings release, due to take place after the bell.

cisco (CSCO) logo on an office building

Source: Ken Wolter / Shutterstock.com

Cisco has faced some challenges during the novel coronavirus pandemic, and it lacks the flash that some tech companies have shown. It also hasn’t seen the boost in business and share price that some companies, such as Zoom Communications (NASDAQ: ZOOM), Amazon (NASDAQ:AMZN) or Microsoft (NASDAQ:MSFT), have enjoyed.

Nonetheless, I’m somewhat optimistic that Cisco will be able to generate a better-than-expected earnings report after the closing bell, and that the groundwork it is laying now in the Internet of Things space will pay off down the road.

Let’s take a closer look.

CSCO Stock at a Glance

If you have a computer, you probably know all about Cisco. The San Jose, California-based company is a leading IT and networking company that has its hands in developing, manufacturing and selling both hardware and telecommunications products.

With a market capitalization of more than $200 billion and annual revenue that exceeds $50 billion, Cisco is one of the biggest computer plays on Wall Street.

But that size hasn’t paid off for investors so far in 2020. CSCO stock is trading near $48 per share – solid, but not spectacular. It fell 33% in early March as the Covid-19 pandemic sucked the life out of the stock market during Q1 and has slowly inched its way back.

For the year, Cisco has nearly managed to make up all of those losses and is now trading relatively flat in 2020.

CEO Chuck Robbins says the company’s underlying fundamentals remain strong and that Cisco’s performance is poised to improve, led by its software as a service (SaaS) and IoT offerings.

“We believe the transition in our own business model through our shift to more software and subscription-based offerings is paying off. We saw continued strong adoption of our SaaS-based offerings and now have 74% of our software that is subscription versus 65% a year ago. We also believe we remain well-positioned over the long-term to serve our customers and create differentiated value aligned to cloud, 5G, Wi-Fi 6 and 400 gig. Our business model, diversified portfolio, and ability to continue to invest in key growth priorities gives us a strong foundation to build even stronger customer relationships.”

Cisco is expected to report Q4 revenue of $12.09 billion, down nearly 10% from the same period a year earlier. Its earnings are expected to come in at 73 cents per share, which would be a 12% drop from a year earlier.

The company also recently announced plans to purchase Acacia Communications (NASDAQ:ACIA) in a $2.8 billion deal that values ACIA stock at $70 per share. The acquisition, which is expected to give Cisco a bigger share of the 5G market with telecom companies, still needs to be approved by regulators in China.

Cisco was already one of Acacia’s biggest customers, accounting for 14% of Acacia’s revenues last year. Acadia’s biggest customer is ZTE Corporation (OTCMKTS:ZTCOF), the Chinese-based telecommunications company.

Robbins has previously said that Chinese government-controlled enterprises were shutting Cisco out as part of Beijing’s trade war with Washington.

It’s All About Networking and IoT

The Internet of Things is a fancy way to talk about how the world — and the things around your house — are increasingly connected to the internet. Everything from printers to baby monitors to household appliances and smart TVs are online, giving users a faster, more convenient lifestyle.

The downside to that, of course, is that online networks are always vulnerable to bad guys who see opportunities to hack into your systems.

Cisco has its own platform, called Cisco Kinetic, that manages the data derived from IoT projects. And it will have a huge opportunity in the coming years to develop innovative security solutions to stay one step ahead of the hackers who are determined to penetrate IoT systems.

Cisco says it saw a 6% increase in fiscal Q3 in revenue from its security products. AppDynamics, its IoT management platform, has grown by double-digit-percentage levels in 2020.

The Bottom Line on CSCO Stock

Surely Cisco will see a year-over-year decline in fiscal Q4 revenue, but it shouldn’t be nearly as rough as Q3. The company’s SaaS products continue to give Cisco a solid revenue stream, and its continued emphasis on providing security solutions to protect IoT networks will be important in FY21.

An earnings beat for Cisco would be welcome for investors.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he was long AMZN.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/earnings-preview-what-to-expect-from-cisco-systems-csco-stock/.

©2021 InvestorPlace Media, LLC