By Wallace Witkowski, MarketWatch
Cisco Systems Inc. is expected to benefit from large companies’ tech spending despite the COVID-19 pandemic, but the struggles of smaller businesses could take their toll.
Cisco /zigman2/quotes/209509471/composite CSCO -0.06% is scheduled to report fiscal fourth-quarter earnings on Wednesday afternoon, always a crucial barometer for IT spending, which has proved to be boon for tech companies during the COVID-19 pandemic. That benefit has been selective, though, as work-from-home and shelter-in-place trends have favored businesses that provide the infrastructure that make that possible: namely cloud data centers, online-conferencing tools and cybersecurity.
Cisco covers all those businesses, but it remains to be seen how well those segments will balance out with the company’s large, on-premise network appliance business, which may take a back seat as businesses are trying to move to the cloud and out of their own private data centers. That is especially true of small-to-medium-sized businesses, or SMB, which make up nearly a third of Cisco’s sales.
Raymond James analyst Simon Leopold said that large-enterprise sales, which make of about 30% of the company’s business, started to improve in June. But channel checks from SMB show weakness, he said, which could especially prove damaging to Cisco’s on-premise network sales, which account for 18% of revenue.
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“We continue to worry that COVID-19 related headwinds present risk to Campus,” or on-premise network sales, Leopold wrote in a note. Checks on data-center switching sales, which account for about 12% in revenue, were “conflicting,” while wireless sales, at about 6% of sales, were “likely depressed” because of a demand drop from hospitality and retail customers.
Leopold, who has an outperform rating on Cisco and a $49 price target, said he thinks the company will meet or beat consensus estimates, but otherwise he lacks conviction.
Service provider demand, accounting for about 20% of sales, “likely provides short term upside,” while collaboration sales, which includes WebEx videoconferencing, are positive even though they only account for about 9% in revenue. Similarly, security is a bright spot, but only accounts for about 6% of sales, Leopold said.
What to expect
Earnings: Cisco on average is expected to post adjusted earnings of 74 cents a share, down from 83 cents a share in the year-ago period, according to a FactSet survey of 25 analysts’ estimates. Cisco forecast 72 cents to 74 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 77 cents a share.
Revenue: Wall Street expects revenue of $12.09 billion from Cisco, according to 22 analysts polled by FactSet, down from $13.43 billion reported last year. Cisco predicted revenue of $11.88 billion to $12.29 billion. Estimize expects revenue of $12.25 billion.
Cisco is expected to report $8.71 billion in product sales, with infrastructure platforms accounting for $6.48 billion of that, applications making up $1.45 billion, and security accounting for $785.8 million, according to FactSet data. Services are estimated to account for $3.37 billion in Cisco sales.
Stock movement: In Cisco’s fiscal fourth quarter, shares gained nearly 19%, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.52% — which counts Cisco as a component — increased 18%, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.19% advanced 20% and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.64% gained 31%.
What analysts are saying
Evercore ISI analyst Amit Daryanani, who has an outperform rating and a $54 price target, said he sees an “attractive” setup to fiscal 2021.
“Our checks through the quarter suggest that parts of enterprise/campus markets remained weaker while service provider and core data center products were more stable,” Daryanani said. “Furthermore, we see healthy acceleration in applications and security given the increased relevance of these solutions.”
“While CSCO will have to contend with a slower enterprise environment and supply issues this quarter, remote working tailwinds benefiting security/applications should provide an offset,” according to Daryanani.
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JPMorgan analyst Samik Chatterjee, who has a neutral rating on Cisco and a $50 price target, said that investors are already expecting better sequential growth going into Cisco’s current fiscal fourth quarter, given resilience in enterprise IT spending as indicated by channel checks during the quarter.
“While there do exist multiple levers in relation to sales and marketing costs as well as buybacks to deliver upside on earnings, we think investor focus will continue to be on revenue and order trends in the quarter,” according to Chatterjee.
“Although, we could see modest upside to sell-side consensus from the better than feared spending,” Chatterjee said, “we believe investors are already pricing in the likelihood of modest upwards earnings revisions, limiting upside in the shares from current levels.”
Of the 27 analysts who cover Cisco, 14 have buy or overweight ratings and 13 have hold ratings, with an average price target of $50.05.