Can Cisco (CSCO) make up for its Q2 guidance miss? The stock has gotten punished over the past six months, falling almost 10% while the S&P 500 has risen 15% during that span. The routing and switching giant is set to report second quarter fiscal 2020 earnings results after the closing bell Wednesday.
The Dow bellwether continues to scale back its switching and routing businesses, while trying to develop growth businesses within service areas such as security, the cloud, data center and analytics. Progress in these areas have been better-than-expected. The stock, however, hasn’t responded as well as investors would like. The company’s downbeat commentary in last quarter’s conference call with analysts has taken its toll.
In November, the management cited multiple factors that caused the company’s conservative revenue outlook, including the U.S.-China trade impasse which at the time impeded growth in Cisco’s end markets. The news sent the stock 6% lower, despite a beat on both the top and bottom lines. In other words, Cisco has quite a bit to prove on Wednesday. And with better-than-expected earnings results from enterprise and datacenter names such as Microsoft (MSFT) and Intel (INTC), Cisco must show it can deliver sustained revenue growth at a time when IT spending is seemingly in recovery mode.
In the three months that ended December, Wall Street expects Cisco to earn 76 cents per share on revenue of $11.98 billion. This compares to the year-ago quarter when earnings came to 73 cents per share on revenue of $12.45 billion. For the full year, ending July, earnings are projected to rise 5.7% year over year to $3.24 per share, while full-year revenue of $51 billion would decline 1.7% year over year.
While the company has faced grown headwinds in its routing and switching franchises, evidenced by the 1% year-over-year decline in Q1 and missing Street estimates, Cisco has scaled up its AI (artificial intelligence) and ML (machine learnings) capabilities into the enterprise. With the company’s acquisition of Voicea, Cisco can now leverage its WebEx portfolio to build capabilities such as AI-based voice-recognition, while delivering meeting transcripts, among other services including collaboration tools that can increase both user engagement and productivity.
While these future opportunities exist, for now it’s about the present and analysts will want to know how much of the increased IT spending has Cisco captured in Q2? Cisco’s security performance, namely web security, will also be a topic of interest. The company’s ability to compete with the likes of Palo Alto Networks (PANW) in the realm of unified threat and network security can warrant a higher multiple.
In Q1 Cisco’s security business delivered $815 million in revenue, above expectations. Along with the Voice deal, Cisco also announced the acquisition of customer experience management company CloudCherry which could further bolster its application revenue. How Cisco plans to integrate these deals remains to be seen. But from a valuation perspective, the shares are attractively priced at just 12 times fiscal 2020 earnings estimates, compared to the S&P 500’s P/E of 19. For that to matter, however, Cisco must demonstrate that value in its performance and outlook.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.