Like most other companies, Cisco's [CSCO] share price has experienced some choppy trading so far this year. It is only 2.04% down on the year, having recovered ground from the coronavirus-triggered selloff in March. Whether the recovery in Cisco’s share price continues will depend on Q4 results, due out this week.
Promisingly, the networking giant beat Wall Street expectations last quarter. Another earnings beat could see Cisco’s share price break out, while a miss could see it plummet. So what should investors watch out for in Cisco's Q4 earnings?
When is Cisco reporting Q4 earnings?
What could move Cisco's share price post-earnings?
Software subscriptions on the rise
Third-quarter results were a mixed bag for Cisco. Revenue came in at $12bn, an 8% decline from the $13bn seen in the same quarter the previous year. Net income was also down, coming in at $2.8bn, a 9% decline from the $3bn seen in 2019.
However, Cisco saw good progress in transitioning software sales to a subscription-based model. In the results, software subscriptions increased 9%, making up 74% of all software revenue, while money brought in from security products increased 6% to $776m year-on-year. Shareholders will be looking for how Cisco is progressing with this shift in Q4 results. Any positive news could bode well for both Cisco's share price and the company's long-term future.
"We executed well in Q3 in a very challenging environment, delivering strong margins and non-GAAP EPS growth," said Kelly Kramer, Cisco’s CFO, in the Q3 earnings call. "The resiliency that we have been building into our business model is paying off, with software subscriptions now at 74% of our software revenue, up 9 points year over year. We are focused on driving long-term profitable growth while delivering shareholder value."
“The resiliency that we have been building into our business model is paying off, with software subscriptions now at 74% of our software revenue, up 9 points year over year. We are focused on driving long-term profitable growth while delivering shareholder value” - Kelly Kramer, Cisco’s CFO
Reduced demand for working from home
Not everyone is convinced that Cisco’s share price is a buy right now, however. On InvestorPlace, John Jagerson and Wade Hansen, editors at Strategic Trader, write that now is the time to sell Cisco shares.
They argue that the sales splurge Cisco enjoyed at the start of the pandemic is not sustainable. As more companies welcome staff back to brick and mortar offices, the demand for products such as virtual meeting software like Cisco Webex could start to slide. Evidence of reduced demand for these products in the results will likely see Cisco's share price fall.
"Companies are still reopening even as cases rise, and those that aren’t won’t be buying any new equipment. CSCO’s sales surge was nice, but it probably isn’t sustainable," wrote Jagerson and Hansen.
“Companies are still reopening even as cases rise, and those that aren’t won’t be buying any new equipment. CSCO’s sales surge was nice, but it probably isn’t sustainable” - John Jagerson and Wade Hansen, editors at Strategic Trader
What is Wall Street predicting for Cisco’s share price?
Wall Street is expecting Cisco to post earnings per share of $0.74 in Q4, down from $0.83 a share in the same quarter last year. Revenue is pegged at $12.08bn, a 10% decline from the $13.43bn seen last year. Cisco itself expects revenue to decrease between 8.5% and 11.5% in Q4, on non-GAAP earnings of between $0.72 and $0.74 a share. Such reductions could well see Cisco’s share price take a hit.
Cisco's predicted revenue - a 10% YoY decline
Will Cisco beat expectations in Q4?
Investment website Zacks is bullish about Cisco's earnings potential this quarter. In Zacks' assessment, Cisco has a history of topping analyst expectations, delivering an average 5.25% surprise for the past two earnings reports. In Q3, Cisco reported earnings of $0.79 per share, easily beating the expected $0.72 per share. For Q4, Zacks Earnings ESP (Expected Surprise Prediction) is 2.52%, suggesting that Cisco could once again top analyst expectations.
|PE ratio (TTM)||18.89|
|Quarterly Revenue Growth (YoY)||-7.5%|
Cisco share price vitals, Yahoo Finance, 10 August 2020
So, time to buy Cisco?
Cisco's share price carries an average $49.76 12-month price target from analysts on Yahoo Finance, which would see a 4.91% upside on Cisco’s share price through 7 August’s close. Among the 27 analysts offering recommendations on Yahoo Finance, 19 rate it either a Strong Buy or a Buy.
Ultimately, Cisco is a high-quality stock that could deliver for investors over the long-term. Adding value for income-seeking investors is a 3.06% forward dividend yield — an increasingly rare thing in today’s markets, topping both Intel and Microsoft's expected yields.