Our channel checks this quarter indicate that Cisco should report at least in-line results for July quarter when the company reports Wednesday after the bell. The Street is looking for total revenues of $12.77 billion and EPS of $0.69 for FY4Q18 (July), both of which could be met with the possibility of some modest upside on the top-line based on our slightly improving checks on the security and switching segments in the US during the quarter although Europe remains choppy. While the macro environment still remains a bit uneven especially on “large ticket” traditional networking deals, we are seeing the combination of better execution, newer product initiatives on cloud/security/IoT, and the focus on recurring revenue translating into a modestly improved selling environment for Cisco in the field and an expanding pipeline heading into FY19. The broadened Cisco portfolio and software centric approach has been a catalyst for the company, as we believe the company’s multi-faceted hardware/software centric approach is music to ears of customers and partners. This was again evidenced by the recent cyber security acquisition of Duo Security for north of $2 billion which further bolster Cisco’s next generation security offering around authentication and paves the way for significant cross-selling opportunities on the horizon in this key area of cybersecurity spending. While the company has clear challenges given secular headwinds in its traditional sweet spot of switching/routing, we believe Cisco is slowly putting together newer growth engines (e.g. security, SaaS model, Cisco ONE, cloud initiatives) to help lay the groundwork for a stronger bookings growth trajectory in FY19. We maintain our Attractive rating and $51 price target.
Slow and steady progress; some secular speed bumps remain. We are expecting no major surprises around October guidance, as based on our work in the field the underlying pipeline and business momentum is modestly improving (although soft spots on its core legacy networking business remain) and the company should be on a trajectory to hit current Street expectations. While management has refocused the company on its core bread and butter networking market with a major product refresh on the horizon over the next 18 to 24 months, clearly Cisco needs to be positioned well on the transformational cloud shift among enterprises over the coming years and not be left behind. Although key acquisitions such as BroadSoft could play a major role here bolstering Cisco’s cloud product footprint, the company’s ability to successfully transform (e.g. SaaS, subscription based model) its business model over the coming years remains the biggest wild card in the eyes of investors on the name. That said, while Cisco continues to struggle driving growth in the near term, we believe the stage is set for the company to see modest growth (~5%) return to the story over the coming years on the heels of more subscription based software revenue and newer growth initiatives such as cybersecurity which could help the stock get re-rated over time, although consistent execution remains front and center for the Street.