Cisco (CSCO) posts its latest earnings on Wednesday, and it's likely to be a closely-watched report.
In 2018, the networking giant showed some resilience as other tech stocks faltered amid trade woes and general anxiety in the market. Wall Street is mostly positive on the stock headed into earnings, with analysts projecting earnings per share of $0.72 for the quarter according to Factset.
Cisco shares were down 1% in pre-market trading on Tuesday as Morgan Stanley analysts downgraded the stock from equal weight from overweight on concerns about the health of its networking security business. Cisco's stock is up roughly 10% so far this year.
"I'm interested in revenue guidance and how much software subscriptions make up total software sales," saidJeff Marks, portfolio analyst for Jim Cramer's Action Alerts Plus, which owns Cisco. "We'll also be watching gross margins and the impacts of DRAM pricing, which is expected to shift from headwind to tailwind in the second half of Cisco's fiscal year."
Here are some other key issues worth keeping an eye on when Cisco reports its fiscal second-quarter earnings on Wednesday after the close.
1. China Challenges, and Opportunities
Trade tensions and the threat of increased tariffs haven't been kind to many U.S. companies, but Cisco does have a unique position relative to China, JP Morgan analysts wrote in early January. Increased concern about the security of Huawei products could send more business into Cisco's lap, given that the two compete in networking products. Those wins could reside in European and Asian markets, where Huawei has more of a presence than in the U.S.
When Cisco reports its latest results, investors will be keyed in for more detail on how such complexities could affect Cisco's revenue going forward. In a note on Monday, Cowen's Paul Silverstein wrote that while trade tensions could pose a risk to Cisco's stock, the company's execution in the face of macroeconomic challenges bodes well for its revenue growth this year: "We expect Cisco's FY2Q19 revenue growth to benefit from Cisco's improving competitive position and strong execution in the face of what appears to be a slowing or challenging macroeconomic environment in regions outside the U.S," he wrote.
2. Evaluating M&A Impact
Cisco CEO Chuck Robbins led Cisco on an acquisition tear in 2018, snapping up Duo Security, July Systems, Accompany and Skyport Systems throughout last year. However, it's not totally clear how much some of those acquisitions have boosted growth in Cisco's subscription and cloud businesses, and how much growth is "organic," Needham's Alex Henderson suggested in a note on Monday. "We think combined acquisition benefit should add significantly to the Security segment, the software and cloud segments, and the Enterprise/Commercial growth rates," Henderson wrote, noting that Cisco hasn't told investors exactly how much growth is tied into acquisitions.
That could similarly leave investors guessing as more deals close. In February, Cisco also closed a $660 million purchase of Luxtera, a semiconductor firm that focuses on silicon photonics, in what it views as bringing an important technology in-house. It could also boost the April quarter guidance, added Henderson: "We think this is likely a positive as it sets the company up nicely to transition from 100G to 400G and adds $100 million plus to Revenues." Still, investors may seek more detail from Cisco on how significantly its acquisitions play into the overall revenue picture.
3. Guidance a Potential Risk
Cisco, now 34 years old, has been undergoing a gradual transition from its roots in networking hardware to a more diversified and software-oriented business. As noted by AAP's Marks, subscriptions are a critical metric to watch given their relative predictability as a revenue source -- but investors may look for further transparency around Cisco's software performance in its fiscal Q3 guidance.
Other networking providers have reported weaknesses in "service provider" segments, wrote PiperJaffray's James Fish in a note last week, which may prove negative for Cisco's outlook given its approximately 23% revenue exposure in the area. In its November 2018 report, Cisco also showed some softness in that segment.
"Investors have been much more skeptical in recent weeks around the software transition, as fewer details have been provided by the company," wrote Fish. "We issue some caution on shares of Cisco into the print given the potential guidance miss."