Cisco (CSCO) is set to report third quarter fiscal 2018 earnings results after the closing bell Wednesday. And unlike previous quarters, expectations are now flying high. But have they risen too fast, too soon?
Cisco shares, which have climbed 18.75% year to date, closed Tuesday at $45.48, just 1.7% away from its 52-week high $46.37. The stock has bested the 1.42% rise of the S&P 500 index and has been the top-performing component of the Dow Jones Industrial Average. The company's strong second quarter results and guidance for the just-ended quarter has been rewarded to the extent that the stock is now near 18-year highs.
After struggling with the top line over the past two years, the computer networking giant last quarter answered the most-pressing question that has weighed on investors’ minds: Will revenue ever grow again? Prior to releasing second quarter's results in February, Cisco had gone on a streak of eight straight quarters during which revenue had fallen. Not only did the tech giant benefit from stronger product sales, there was also a meaningful improvement in product gross margins.
On Wednesday analysts will want to see if these trends can continue. In the three months that ended April, Wall Street expects Cisco to earn 65 cents per share on revenue of $12.43 billion. This compares to the year-ago quarter when the company earned 60 cents per share on revenue of $11.94 billion. For the full year, ending July, earnings are projected to 7.94% year over year to $2.58 per share, while full-year revenue of $49.14 billion would rise 2.4% year over year.
The top line will no longer be an issue. In fiscal Q2, revenues grew almost 3% year over year to $11.9 billion, topping not only analysts’ forecasts but also marking the company's best performance this decade. While revenue is expected to grow for the second consecutive quarter, Cisco must still answer when will its business transformation, which began this decade, be complete?
The company has been working be become more of a software-centric subscription-based business, while scaling back from its routing and switching franchises that it has been long known for. Its $1.71 billion deal for BroadSoft, which specializes in cloud-based software used by major cable and telecom networks, was the most recent example. And deals of this caliber are starting to pay dividends as evidenced by the 36% surge in second-quarter recurring software and other subscription-related revenues.
The company is now benefiting immensely from high-growth/software-centric areas such as the Cloud, security and Internet-of-Things. Investors will want to see the extent to which these positive trends can continue not only for the just-ended quarter, but also throughout the year. Meanwhile, from a valuation perspective, CSCO shares — at just 16 times fiscal 2019 EPS estimates — are cheap enough to give the company time to execute, especially with its 3.05% annual dividend yield.