Cisco: what do need to know ahead of its earning?

By Brian Gilmartin
Seeking alpha

Summary

• The network giant reports Wednesday night after the close.
• Cisco needs to generate revenue growth eventually.
• The Dividend yield at 3.6% will attract yield fans, BUT dividend dollars as % of free-cash-flow now over 60%.
• Did Cisco not have an incentive stock options last quarter?

Cisco Systems (CSCO), the networking giant and one of the mom-mo names of the late 1990's that created tremendous value for shareholders, will report their fiscal Q4 '17 earnings after the bell Wednesday night, August 16, 2017. 

Analyst consensus is expecting a little over $12 bl in revenue which is expected to generate $0.61 in earnings per share for year-over-year declines of -5% and -3% respectively. 

And therein lies the tale of Cisco: all those supposed bolt-on acquisitions, paid for with the incentive stock option crack, that - as Mr. Buffett puts it so succinctly - is a perfect example of "buying high and selling low" all of which has yet to generate any kind of meaningful revenue or net income growth, outside of share purchases to offset the dilution and add barely positive EPS growth. 

In the earnings preview from last quarter, the table's showing the long-term growth of revenue, operating income and EPS were very telling. 

The chart of Cisco last quarter was actually looking a little better, and with a trade over the late 2007 high of $33.50 - $34, you'd get a better looking chart which might indicate a turn in the fundamentals. 

However, last quarter's earnings report tanked the stock - again - and Cisco has languished in the low $30's once more. 

The daily chart shows that Cisco has regained its 200-day moving average just prior to earnings so perhaps there is good news ahead. 

Let's look at the numbers:

	Q4 '17 est	Q3 '17	Q2 '17	Q1 '17
2019 EPS est	$2.56	$2.55	$2.60	$2.60
2018 EPS est	$2.45	$2.45	$2.49	$2.49
2017 EPS est	$2.38	$2.38	$2.38	$2.37
2019 est EPS gro rt	4%	4%	4%	4%
2018 est EPS gro rt	3%	3%	5%	5%
2017 est EPS gro rt	1%	1%	1%	0%
2019 P.E	13(x)	12(x)	13(x)	12(x)
2018 P.E	13(x)	13(x)	13(x)	12(x)
2017 P.E	13(x)	13(x)	14(x)	13(x)
2019 rev est ($'s bl's)	$49.3	$49.4	$50.8	$50.9
2018 rev est	$48.2	$48.4	$49.5	$49.5
2017 rev est	$47.9	$47.9	$48.4	$48.3
2019 est rev gro rt	2%	2%	3%	3%
2018 est rev gro rt	1%	1	2%	2%
2017 est rev gro rt	-3%	-3%	-2%	-2%

Source: Thomson Reuters I/B/E/S consensus estimates as of 8/15/17 

Note how EPS and revenue estimates continue to slowly get revised lower 

Estimated forward revenue and EPS growth is expecting 0% revenue growth on 3% EPS growth for the next three years. 

That's not great, but you could make a case the stock is priced for it. 

Analysis/Conclusion

To avoid writing War & Peace, here are a few positives and negatives to listen for in the call Wednesday night. However as of yet there is no sign of a turn yet for Cisco revenue growth, and I think that is what matters: 

1.) Expect more layoffs Wednesday night, which has allowed Cisco to expand it operating margin to the best level since 2004 per one sell-side analyst. (Jefferies) 

Here's a quick table of Cisco's operating margin for the April quarter the last 5 years: 

	Cisco Op Mgn	y/y chg
4/17	32%	+235 bp's
4/16	30%	+134 bp's
4/15	29%	+0.53
4/14	28%	-0.16%
4/13	28%

Source: internal spreadsheet 

Unfortunately the margins are coming at the expense of Cisco employees, but without revenue growth, Cisco has to do something to drive EPS growth 

2.) The Service provider market is still weak, down 10% in the April quarter. Let's see if that has changed. Revenue guidance was cut for the August '17 quarter. 

3.) Security and Software segment, which I thought could be a secular growth area for Cisco was rather weak in q3 '17. Let's see if that changes. 

One ambiguous positive for Cisco is cash-flow "ex-cash" at 6(x) cash-flow and 13(x) free-cash-flow ex-the balance sheet cash. Cisco has a 3.6% dividend yield BUT the dividend dollars as a percentage of free-cash-flow has risen to 62% which should tell readers that it is taking more and more free-cash to finance the dividend and with all the dilution, if Cisco doesn't start growing revenue and cash-flow, the road ahead will end badly. (Not a reason to panic yet, but cash-flow growth has disappeared with revenue growth.) 

One client remains long one position from June, 1997 in their account. Cisco was a great company but the stock needs to demonstrate some form of revenue growth before getting interested again in any size. 

Disclosure: I am/we are long CSCO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.