Previewing Cisco's Earnings
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Cisco (NASDAQ: CSCO) gives results next week and they always tend to move the markets. It is such a wide ranging company that many conclusions and pointers can be garnered from looking at the numbers from its component parts. If you are holding one of these companies or, even Cisco itself, it is useful to prepare for the results. I thought I would give investors a ‘heads up’ on what they might expect.
For the record I don’t think Cisco’s last results were particularly good. However investors were pleased by the commitment to return free cash flow to shareholders and by the dividend hike. In a way these measures confirm the main attraction of Cisco these days as being a kind of value dividend play. The hard reality is that it got that way because the market doesn’t really seem to believe in its growth potential anymore.
It's time to look at how Cisco generates its revenues.
Switching & Routing
I'll start with Cisco’s core divisions of switching and NGN routing. Here are yearly growth rates.
I’m not expecting anything great here. IBM (NYSE: IBM) recently talked of a fall off in enterprise spending in September and precious few tech companies have reported results that contradict this view. Given the lumpiness in Cisco’s switching and routing divisions over the last few years it is hard to argue that it wil report anything great here.
As evidenced above Cisco was up against some pretty weak quarters in the previous year within switching, but the easy comparisons seem to stop going into Q1 2013. I would expect a decline in revenues and my back of envelope benchmark would be for switching revenues around $3.55 billion.
As for routing,
Q1 tends to see a sequential pick up of around 4.5% but the previous quarter’s numbers were pretty strong. Was there some pull forward? We shall see. Again a vague benchmark number to look for in routing would be around $2.15 billion.
My guess is that the numbers could come in weaker then these figures. I suspect this because telco dependent companies like Acme Packet (NASDAQ: APKT) reported weak spending by Tier 1 carriers and F5 Networks (NASDAQ: FFIV) also reported another sequential decline in spending from telcos. The ISPs and carriers are certainly not ramping up spending. And finally, look out for any commentary on whether Chinese rivals such as ZTE or Huawei are being price competitive in order to try and grab market share.
Collobaration & SP Video
For the sake of brevity I want to look at these two together. Collaboration encompasses unified communications, call center and TelePresence. A look at how year on year revenue growth is progressing.
Collaboration competes with a company like Polycom which recently reported a .5% decline in sequential revenues. Cisco’s results tend to mirror Polycom’s, but I suspect the latter’s initiatives have helped it grow a bit better than Cisco. On that basis beating the sequential move of Polycom would see Cisco reporting higher than $985 million in revenues for collaboration. Although I wouldn’t be surprised to see a number lower than this because things like TelePresence really are geared towards expansionary spending by enterprises.
As for SP Video this division tends to report a double digit decline in sequential revenues going into Q1 so don’t be surprised if there is a decline again here. A guesstimate would see revenues here at around $865 million.
Wireless, Security, Data Center and Services
These are the strongest growth areas for Cisco and I would expect it to be the same this time. Wireless spending has remained strong and it remains the one area of telco spending that has held up pretty well. Verizon has largely rolled out its wireless network but AT&T’s spending plans remain on track this year. Security spending growth is possibly going to slow a bit as companies like Fortinet have lowered estimates recently. I would be looking for at least $340 million from Cisco in security in the quarter.
Data Center Spending has been a strong area this year as most of the leading players have upped their spending plans in line with strong customer demand. Cisco will almost certainly report very good growth here, but I think next year’s growth will not be as stellar. For example data center service company Equinix (NASDAQ: EQIX) is planning to reduce CapEx spending next year to $550-650 million from $780 million this year and there are signs that gross margins at the data center companies are starting to peak.
Moreover Cisco seems to be losing market share in some of its niche markets. Riverbed is ahead of it in WAN optimization, Cisco is not the leading player in security and it is even pulling back on investing in its application delivery controllers therefore leaving the field clear for F5 Networks to grab even more market share.
An aggregate figure of around $1.3 billion for these three divisions seems likely.
The last segment is Services which is also likely to be the most predictable. Interpolating from current trends gives a rough target of $2.58 billion to look out for here.
Putting it all Together
By my back of envelope assumptions Cisco might report something near $11.7 billion in revenues when the analyst consensus is $11.8 billion, but who know's? Companies are always capable of generating a bit of extra revenue here and there. The most useful analysis will focus on how these trends are evolving over time and the color from the commentary around the results. For investors in its competitors there will be some volatility based around what Cisco says. This is well worth keeping an eye out for.
My hunch is that if Cisco misses, the stock will get slammed and then the value hunters will move in to start buying but if it beats and goes up the profit takers will start to file out. In other words the stock will remain range bound. It is a decent dividend play but it is not executing in its growth strategies and tech investors usually want to see the latter.
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SaintGermain has position in F5 Networks. The Motley Fool owns shares of F5 Networks and International Business Machines. Motley Fool newsletter services recommend Acme Packet, F5 Networks, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.