What Can We Expect from Cisco Systems in Fiscal 3Q18?

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1 What Can We Expect from Cisco Systems in Fiscal 3Q18? By Adam Rogers May 11, :50 PM Analysts Expect Cisco s Revenues to Rise ~4% in Fiscal 3Q18 Average revenue estimate of ~$12.4 billion in fiscal 3Q18 Cisco Systems (CSCO) is expected to announce its fiscal 3Q18 1 results on May 16. Analysts expect Cisco Systems to post revenues of ~$12.4 billion in fiscal 3Q18, representing a 4.1% YoY (year-over-year) increase from its revenues of ~$11.9 billion in fiscal 3Q17. Wall Street has a high revenue estimate of ~$12.5 billion and a low estimate of ~$12.3 billion for the company in fiscal 3Q18. Analysts expect Cisco Systems to post non-gaap 2 EPS (earnings per share) of $0.65 in fiscal 3Q18. They have a high EPS estimate of $0.67 and a low estimate of $0.63 for the stock. In fiscal 3Q18, analysts expect Cisco Systems EPS to rise 8.3% YoY from $0.60 in 3Q17. Cisco beats estimates in three of the last four quarters As shown in the chart above, Cisco Systems has beaten analysts EPS estimates in three of the last four quarters. In fiscal 2Q18, C isco Systems reported earnings per share of $0.63, which were 6.8% higher than analysts estimate of $0.59. C isco Systems posted EP S of $0.61 and $0.60, respectively, in fiscal 1Q18 and fiscal 3Q17. In these quarters, its earnings per share were 1.7% and 3.4% higher than analysts estimates,

2 respectively. C isco Systems met analysts EP S estimates of $0.61 in fiscal 4Q17. C isco Systems is a communications equipment giant with a market cap of $222.0 billion. Its peers include Nokia (NOK), Ericsson (ERIC), and Juniper Networks (JNP R) have market caps of $29.0 billion, $26.0 billion, and $9.0 billion, respectively. 1. fiscal 3Q18 ended April generally accepted accounting principles Cisco Systems' Revenues Expected to Increase in Fiscal 2018 Revenue growth of 2.4% expected by analysts in fiscal 2018 Previously, we learned that analysts expect Cisco Systems (CSCO) revenues to rise ~4.1% YoY (year-over-year) in fiscal 3Q18. The company s earnings per share (or EP S) are expected to rise ~8.3% in the quarter. Analysts expect C isco Systems revenues to rise 4.9% YoY to ~$12.7 billion in fiscal 4Q18 and 2.4% YoY to ~$49.2 billion in fiscal Its revenues are expected to rise 2.9% YoY to $50.6 billion and 3.1% YoY to $52.2 billion. Cisco s non-gaap 1 earnings per share are expected to rise 13.0% to $0.69 in fiscal 4Q18 and ~8.0% to $2.58 in fiscal Its earnings per share are expected to rise ~11.0% to $2.86 in fiscal A rise in revenues during fiscal 2018 and fiscal 2019 could drive its profit margins upward. Analysts expect peers Juniper Networks (JNP R), Hewlett P ackard Enterprise (HP E), Nokia (NOK), and Ericsson (ERIC) to see their revenues rise -5.0%, -12.5%, 2.4%, and -2.4%, respectively, in

3 fiscal Earnings and operating profit Cisco Systems profit margin rose more quickly than its revenue growth in 2016, and this trend is expected to continue in Cisco Systems earnings per share are expected to increase at a compound annual growth rate (or CAGR) of 9.5% over the next five years, compared with 4.7% in the last five years. In fiscal 2016, the company reported EBITDA 2 of ~$16.5 billion, up 6.1%. Its operating profit rose 6.5% to ~$15.1 billion, compared to revenue growth of less than 0.2%. In fiscal 2017, its EBITDA rose 1.5% while its operating profit rose ~0.31%, compared to its revenue decline of 2.5%. Analysts expect C isco Systems EBITDA to rise, increasing 3.1% in fiscal 2018, 3.8% in fiscal 2019, and 2.2% in fiscal The company s operating profit is also expected see continued increases, rising 0.3% in fiscal 2018, 5.0% in fiscal 2019, and 3.8% in fiscal generally accepted accounting principles 2. earnings before interest, tax, depreciation, and amortization Can Cisco s Applications Segment's Revenues Grow in Fiscal 3Q18? Revenue rose in first two quarters of fiscal 2018 C isco Systems (C SC O) Applications business includes revenues from its collaboration vertical as well as analytics and IoT (Internet of Things). C isco s Applications segment generated revenues of $4.6 billion in fiscal 2017, an increase of 3.0% YoY (year-over-year), compared to $4.4 billion in fiscal This business segment has experienced revenue growth of 6.0% YoY in fiscal 2016 and 9.0% YoY in fiscal 2016 as well. Cisco Systems Application revenues rose 6.0% YoY to $1.3 billion in fiscal 1Q18 and 6.0% YoY to $1.2 billion in fiscal 2Q18.

4 Cisco Systems announced intent to acquire Accompany Earlier this month, Cisco Systems (CSCO) announced that it is looking to acquire Accompany for $270.0 million. Accompany is an AI-driven (artificial intelligence) relationship intelligence platform that helps customers find new prospects, strengthen relationships, and navigate selling prices. This acquisition is expected to help C isco Systems penetrate the collaboration space. Accompany s AI tech is expected to help the company target and accelerate priority areas such as providing user data in WebEx meetings. C isco Systems expects this acquisition to enhance its customer experience. C isco Systems aims to leverage the potential of AI and machine learning capabilities in its collaboration portfolio. Accompany s C EO and founder, Amy C hang, plans to join C isco Systems as senior vice president of the C ollaboration Technology Group. C hang stated, Enterprise applications are rapidly becoming more intelligent and augmented with data and pertinent information in real-time. By combining Accompany s relationship intelligence capability with C isco s award-winning collaboration product portfolio, customers will be able to more intelligently collaborate with employees, customers and partners. The acquisition is expected to be completed by the end of fiscal 4Q18. Cisco Led the Enterprise Collaboration Market at the End of 4Q17 Cisco edges out Microsoft to lead the collaboration market According to Synergy Research, C isco Systems (C SC O) has maintained a slender lead over Microsoft (MSFT) in the enterprise collaboration market. C isco Systems has a market share of ~13.0% in the collaboration space, compared to 12.0% for Microsoft.

5 Synergy Group stated that while C isco s market share in collaboration remained stable during each quarter in 2017, Microsoft managed to increase its share during the year. C isco s market share was 1.0% higher than that of Microsoft in the first three quarters of This difference was less than 1.0% in 4Q17. The other top players in the collaboration space include IBM (IBM), Avaya, Google (GOOG) (GOOGL), AT& T (T), Verizon (VZ), P olycom, and UNIFY. C isco leads the overall collaboration market, as it has a share of ~25.0% in premise-based solutions and has achieved revenue growth in the hosted and cloud verticals. Microsoft, on the other hand, leads the high growth hosted/cloud collaboration market. This market is a fragmented one, with several players where the leader has a share below 9.0%. Collaboration revenues almost touched $10 billion in 4Q17 According to Synergy Research s report, collaboration revenues include several verticals such as enterprise voice, UC applications, software, enterprise content management, telepresence, enterprise social networks, and several hosted/cloud communication applications. Revenues rose to an all-time high in 4Q17 and stood just below $10.0 billion. Revenues from hosted/cloud solutions rose 26.0% YoY (year-over-year) in 4Q17. Revenues from premise-based systems fell 4.0% in the quarter ended December Teamwork applications drove demand with emerging areas such as cloud/hosted , cloud file sharing, and C C aas (contact-center-as-a-service). How Could Cisco s Infrastructure Business Perform in Fiscal 3Q18? Revenues rose in fiscal 2Q18 after declining in fiscal 1Q18 C isco s (C SC O) Infrastructure segment is the firm s largest division, accounting for ~55.0% of the company s total revenues in fiscal 2Q18. This business comprises revenues from verticals such as

6 Switching, NGN Routing, Wireless, and Data C enter. In fiscal 2Q18, C isco s Infrastructure P latform generated revenues of $6.7 billion, representing growth of 2.0% YoY (year-over-year). Infrastructure revenues declined 4.0% YoY to $27.8 billion in fiscal 2017 and fell 4.0% in 1Q18 as well. While revenues from this business were flat YoY in fiscal 2016, they rose 6.0% YoY in fiscal A mature global environment and competition from C hina s (FXI) Huawei led to marginal revenue growth for Cisco in this business over the last few quarters. Digital transformation key driver for Cisco Several enterprise trends are driving digital transformation for companies. The growth of BYOD (Bring Your Own Device) and increasing investment in IoT (Internet of Things) has also accelerated demand for a secure connected network. C isco has estimated the global spending for Network Operations, Labor, and Tools to reach $60.0 billion. C ompanies are also adopting multi-cloud strategies that require a unified, scalable, and secure environment across portfolios. C isco has gained significant traction in its subscription-based C atalyst 9000 switching platform. The company has doubled its customer base in the last three months to exceed 3,100. This is C isco s fastest-growing product and is estimated to drive revenues for the company. Cisco Systems Led the Enterprise Infrastructure Market in 2017 Enterprise infrastructure spending reached $113 billion in 2017 According to Synergy Research Group, vendor revenues across six key enterprise infrastructure segments rose 3.0% YoY (year-over-year) from 4Q16 to 3Q17. Aggregate revenues in the period touched $113 billion. Data center servers comprised the largest segment, although revenues in this segment declined 1.0% YoY. Switches and routers comprised the second-largest sector and experienced revenue growth of 4.0% in the period. Revenues were driven by the hosted and cloud collaboration sector, and the on-premise collaboration space saw ongoing market disruption and challenges for companies in the form of aggressive product pricing.

7 Cisco is the largest player in this space Cisco Systems (CSCO) maintained its rank as the dominant company in terms of market share, as it led four of the six segments. Cisco is ranked second in hosted and cloud collaboration, and it ranked fifth in data center servers. C isco s overall market share in enterprise infrastructure stands at 26.0%, a YoY fall of 1.0% YoY. Hewlett Packard Enterprise (HPE) was the second-largest player with a share of 11.0%. HPE led the data center server market, occupies the second position in WLAN (wireless LAN), and is ranked third in switches and routers. Microsoft (MSFT) leads the hosted and cloud collaboration segment and ranks second in on-premise collaboration. Synergy Group believes that there has been a spending shift toward hosted solutions and subscription-based models. Synergy Research s founder and chief analyst, Jeremy Duke, noted, Despite a burgeoning public cloud market, enterprise IT infrastructure spending was still on the rise in 2017 and will be for the next five years. Arista Networks Is Challenging Cisco in Campus Networking Arista Network stock is up ~6% this week Arista Networks (ANET) stock is up more than 6.0% this week after it declined 8.5% on May 4, driven by disappointing revenue guidance provided by the firm. Arista Networks is one of the most disruptive networking companies in the industry. On May 8, the company revealed products that it expects to challenge C isco Systems in the campus networking space. Arista Network estimates the total available market (or TAM) to be $3.0 billion $4.0 billion. However, it doesn t expect any material revenues from these initiatives until fiscal Morgan Stanley (MS) is optimistic about Arista Networks and reiterated an overweight rating in the stock with a price target of $

8 Morgan Stanley analyst James Faucette stated, For us, ANET s attraction as a stock is the push into new markets, including campus, that the company is just beginning. Cisco reported a decline of 1.4% YoY in Ethernet switching Arista Network (ANET) is quickly becoming a major player in the Ethernet switching space. In 4Q17, ANET recorded revenue growth of ~41.0% YoY and held a market share of 5.9%. In 2017, its revenues rose 44.5%, and ANET had a market share of 5.6%. Cisco Systems (CSCO) revenues fell 1.4% YoY in Ethernet switching and ended 4Q17 with a market share of 53.0%. In 2017, Cisco s Switching revenues rose 1.5% with a share of 54.9%. Cisco s Security Segment's Revenue Growth in Fiscal 3Q18 Security segment s revenues rose 6% YoY in fiscal 2Q18 Cisco Systems (CSCO) Security segment accounts for less than 5.0% of Cisco s total revenues. However, this is a high-growth segment for C isco and helps offset declines in other mature businesses. In fiscal 2Q18, C isco s Security segment s revenues rose 6.0% YoY (year-over-year) to $558.0 million, up from $526.0 million reported in fiscal 2Q17. C isco has experienced revenue growth of 10.0% YoY in fiscal 2017 this business reported revenues of $2.2 billion. Revenues also rose 8.0% to $585.0 million in fiscal 1Q18, compared to $541.0 million in fiscal 1Q17.

9 Demand for network security increases, driven by the rise of cyberthreats. C isco has a diversified portfolio of solutions and is optimistic about revenue growth in network security. Earlier this year, C isco announced a partnership with Apple and insurance firm Allianz. According to the partnership agreement, cyber insurance discounts would be offered to businesses using equipment and technology from Apple and C isco Systems. Insurance broker Aon plans to help companies by strengthening their cybersecurity platforms, making them eligible for competitive insurance terms. Cisco s market share of ~15.9% in the Security Appliance market At the end of 2Q17, Cisco System led the global security appliance market with a share of 15.9% compared to 16.3% in 2Q16, 17% in 2Q15, and 18.2% in 2Q14. C isco faces competition from peers Check Point Software Technologies (CHKP), Palo Alto Networks (PANW), Fortinet (FTNT), and Symantec (SYMC), which have market shares of 12.6%, 14%, 10.6%, and 4.6%, respectively. Cisco Systems Stock Has Risen ~21% in 2018 Cisco s historical stock returns Cisco Systems (CSCO) stock has returned 37.0% in the last 12 months, 8.9% in the last month, and 4.2% in the last five days. Cisco stock rose 15.0% in 2016 and 31.0% in Since the start of 2018, it s risen almost 21%. Peers IBM (IBM), Ericsson (ERIC), Palo Alto Networks (PANW), and Nokia (NOK) have returned -4.0%, 22.0%, 78.0%, and 3.4%, respectively, in the last 12 months.

10 Analysts recommendations and price targets Of the 33 analysts tracking C isco Systems, 24 recommended a buy, nine recommended a hold, and none recommended a sell. Analysts 12-month average price target for C isco is $49.39, and the median estimate is $ C isco is trading at a discount of 8.0% to analysts median estimate. Moving averages On May 10, Cisco closed the trading day at $ Based on that price, the stock is trading: 9.2% above its 100-day moving average of $ % above its 50-day moving average of $ % above its 20-day moving average of $44.56 Cisco is trading 52.0% above its 52-week low of $30.36 and just 0.2% below its 52-week high of $ Relative strength index C isco Systems 14-day MAC D (moving average convergence divergence) is A stock s MAC D marks the difference between its short-term and long-term moving averages. C isco s positive MAC D score indicates an upward trading trend. C isco has a 14-day RSI (relative strength index) score of 68, which shows that the stock is trading very close to overbought territory. An RSI score above 70 indicates that a stock has been overbought, while an RSI score below 30 suggests that a stock has been oversold.

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