With Cisco's latest earnings release coming up, investors are about to get a better view of the company's ongoing shift to software -- and how the macroeconomic environment has affected that transition.
"Like a lot of hardware leaders from the first wave of networking, Cisco has seen its primary business eroded by software. It's a classic victim of the digital transformation in which physical stuff like routers is being replaced at customers' facilities by software at lower prices," said Maven tech columnist Jon Markman. "That said, it has become one of the few value plays in technology and might find a bid by investors looking to buy techs at lower valuations than the Nvidias, Microsofts and Salesforces of the world."
For the quarter ending in July, analysts are expecting earnings of 74 cents per share on revenue of $12.09 billion. Here are a few key themes to watch when Cisco (CSCO) - Get Report reports its results on Wednesday, August 12.
1. Supply Chain
Cisco, a market leader in networking, cautioned partners and customers last quarter that COVID-19 had impacted its supply chain, and to anticipate delays in certain products such as data center servers. In Cisco's fiscal third quarter, which ended in April, the company said that supply chain disruptions contributed to a 15% drop in its Infrastructure Platforms segment. On Wednesday, company management will likely offer more detail on the pandemic's effects by segment, and may provide further color on whether supply chain issues have been fully resolved.
2. Enterprise Demand
In Juniper's (JNPR) - Get Report recent earnings release, investors got a preview of enterprise demand for networking products and services, given that the two companies have overlapping products in many areas. Citing work-from-home tailwinds, Juniper reported strong results in its Cloud and Telecom segments and only a slight downtick in its Enterprise segment, which fell just 1.5% year-over-year. In a recent note, RBC analyst Robert Muller noted that Cisco's relatively heavy enterprise exposure comes with risks in the economic downturn, writing that "cost-conscious CIOs will push out projects and run equipment hotter as Enterprises look to cut costs." Cisco investors will look to management on Wednesday for commentary on enterprise demand.
3. WebEx and Software
In the new work-from-home status quo, a number of Cisco's software offerings are likely to show strong results. One of these is WebEx, its videoconferencing solution, which saw a surge in usage as lockdowns began. Cisco doesn't break out WebEx revenue -- it's grouped in its Applications segment -- but will likely offer some comments on free trial trials and WebEx's contributions to the segment's revenue. Cisco's security offerings are also likely to show strength, but comprise only a small percentage of Cisco's overall top line. Ahead of earnings, analysts are modeling for $1.45 billion in applications revenue and $786 million in security revenue.
4. Services Outlook
Given Cisco's gradual transition from hardware to a software and services firm, investors are perpetually interested in the predictability of recurring revenue. One of the biggest focal points of Cisco's upcoming earnings call will be the outlook for its service provider segment, which has grown at a low rate in recent quarters amid a slowdown in services spending. Investors will be watching for any updates on when that segment will see significant growth again, whether it's been helped or hurt by COVID-19, and any tangential impacts related to network connectivity. Analysts are expecting revenue of $3.37 billion in Cisco's services segment.