Soft Q2 2017 Revenue and EPS View Turns Cisco Bearish

Soft Q2 2017 Revenue and EPS View Turns Cisco Bearish
November 22, 2016

Better than anticipated fiscal 2017 first-quarter results coupled with a 190 basis point increase in the non-GAAP gross margin to 64.7%, and $70 billion in cash and cash equivalents had practically no positive effect on the stock of networking hardware manufacturing company Cisco Systems Inc (NASDAQ: CSCO). Following the results, the stock had so far lost about 8% and closed Monday’s trading session at $30.15. We anticipate further decline in the share price due to the reasons mentioned underneath.

The San Jose, California-based company reported marginal decline in the first-quarter revenue to $12.352 billion, from $12.682 billion in the similar period of 2015. However, the first-quarter revenue beat the analysts’ estimates of $12.34 billion.

The Q1 2017 net income of $2.322 billion or $0.46 per share was a little bit lower than the $2.430 billion or $0.48 per share reported in the Q1 2016. Excluding amortization charges and share-based compensation expenses, among others, the first-quarter non-GAAP income increased to $3.10 billion or $0.61 per share, from $3.02 billion or $0.59 per share in the first-quarter last year. The quarterly earnings also beat the Zacks estimates of $0.60 per share.

Barring the NGN routing and Security segment, all other segments reported a y-o-y decline in revenue. The Switching segment reported a 7% y-o-y decrease in revenue to $3.72 billion. Both Collaboration and Data segment recorded a 3% decline in revenue to $1.084 billion and $834 million respectively. The Wireless segment posted a 2% fall in revenue to $632 million. Likewise, the Service Provider Video segment posted 2% fall in revenue to $271 million. The NGN Routing segment reported a 6% increase in revenue to $2.09 billion, while the Security segment announced an 11% rise in revenue to $540 billion.

At the end of first-quarter, the total debt of Cisco was $34.8 billion, up from $28.6 billion in the fourth-quarter of 2016. Similarly, net cash flow from operating activities in the first-quarter decreased to $2.73 billion, from $3.82 billion in the fourth-quarter. Correspondingly, the free cash flow plunged by almost $1.10 billion in the first-quarter.

Considering the headwinds faced by the company, Cisco anticipates revenues to decline in the range of 2% to 4%, from the second-quarter last year. The company also expects non-GAAP earnings to be between $0.55 and $0.57 per share. The company reported non-GAAP earnings of $0.57 per share in the second-quarter of fiscal 2016. Thus, we can infer that the company anticipates a decline or flat earnings in the second-quarter of 2017, compared to last year. So, considering the details provided above, fundamentally the stock would remain weak in the current quarter.

The price chart shows that the stock has failed to successfully break the resistance level of 31.50. The stochastic oscillator is retreating after recording a reading of 100. So, we can expect the stock to come down and test the next major support level of 29.

Cisco Systems - Technical Analysis - 22nd November 2016

A one touch put option would enable a trader to gain from the probable downfall in the stock. The strike price for the put option should be $29, while the expiry date should fall in the third-week of December.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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