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Weak Hardware Spending Will Likely Drive Cisco's F3Q16 Results

Author: Bo Haug, Published: May 18, 2016 at 2:50pm, Category: Earnings Preview

Cisco Systems (NASDAQ:CSCO) will report fiscal third quarter results on Wednesday, which will likely show continued weakness in enterprise spending as many of the company's peers have already reported soft results across the board. In addition, management discussed a slowdown in spending at the close of the fiscal second quarter in January on last quarter’s earnings call, which have continued into the third quarter. 

Data center results, while providing less contribution to total earnings compared to switching and routing, will offer an important data point this quarter.  Last quarter management explained the weak data center sales as a reflection of global macro-economic headwinds. Given that the data center sales cycle typically experiences a strong buying period through the end of December, there is no guarantee that this quarter will see a snap back from last quarter’s contraction.

From a positive standpoint Cisco could surprise the market if the strong growth in the cloud-based Software-as-a-Service (SaaS) businesses including WebEx and Meraki cloud networking continues.

Management’s guidance – Fiscal third quarter 2016
Last quarter management expanded their typical two percentage point revenue guidance range to three points, which reflected the lower visibility given recent macro and structural driven changes. We will be listening tonight to see if management reverts back to their tighter guidance ranges for the fourth fiscal quarter. The latest guidance provided by management is as follows:

•    Revenue growth of 1% to 4% Year over Year (YoY), excluding SP Video CPE Business. 
•    Non-GAAP gross margin between 62.5% and 63.5%.
•    Non-GAAP operating margin rate between 28.5% and 29.5%.
•    Non-GAAP tax provision rate 22%.
•    Non-GAAP Earnings per share between $0.54 and $0.56.
•    Share-based compensation expense between $0.05 and $0.06.
•    Amortization of purchased intangible assets and other acquisition related costs between $0.03 and $0.05.
•    Restructuring and other charges between $0.00 and $0.01. 

Source: Management’s guidance from the F2Q16 earnings call.

The author of this article has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in this article represent the author’s opinions.

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