Will Cisco Earnings Reflect the “Shallow Pause” Syndrome?

What’s happening: Cisco Systems is scheduled to report its earnings results for the second quarter after the closing bell on Wednesday, February 12.

What happened: Cisco has topped quarterly estimates for both earnings and revenue for the past two years. However, over the last three months, the Silicon Valley-based technology conglomerate has issued warnings of a tough macro environment and quarterly estimates for its second quarter have been revised down several times.

• The consensus revenue estimate stands at $11.98 billion, representing a 3.8% year-over-year decline.

• The estimate for earnings is 76 cents per share, with 4.1% growth from the same quarter in the previous year.

Why it matters: The networking giant did not start the year on a positive note and its stock has been battered by the market for this.

In November, Cisco warned that its top-line was being impacted by a broad-based slowdown in tech spending. Although terming the situation as a “shallow pause,” the company said the slowdown was not limited to certain regions, rather was being felt across its global markets.

Cisco issued a tepid earnings forecast for the second quarter, while warning of as much as a 5% revenue decline. The company has recently been focusing on strategic buyouts to execute its reorganization plan. It is also expanding into areas like analytics and cybersecurity, while aiming to maintain its leadership in its core business.

On a more positive note, growing instances of security threats at enterprises globally has boosted demand for web and security as well as advanced threat solutions, which has been a tailwind for Cisco. The company’s cybersecurity segment is likely to deliver solid growth this quarter, with offerings from the Jasper and AppDynamics businesses expected to support revenue.

How the shares have performed so far: Cisco’s stock has attracted lukewarm investor sentiment, gaining only 1.5% over the last 12 months, versus a 23% rise in the broader S&P 500 index over the same period. The networking giant’s shares have declined by around 8% since the previous earnings release.

What to watch: With most companies reporting upbeat results this earnings season and the US stock indices breaking record highs, Cisco will be under immense pressure to beat estimates this quarter. Expectations have also been fuelled by the recent earnings releases by other networking companies, including Arista Networks, Extreme Networks and Juniper Networks.

Investors will also look forward to Cisco management's comments on the "shallow pause" and key growth areas during the earnings call, in addition to outlook for the next quarter. The market will watch the US indices, where Cisco is a major constituent.

Context: US stocks closed mostly higher Tuesday amid hawkish comments from Federal Reserve Chairman Jerome Powell, a positive earnings season and easing coronavirus fears.

Details: After closing at a record high on Monday, the Nasdaq and S&P added more gains to create another record on Tuesday, while the Dow closed flat. Tech stocks delivered a weak performance.

The S&P 500 rose 0.17% and the Nasdaq gained 0.11% on Tuesday. Investor sentiment was boosted by remarks by the Fed Chairman around the US economy “performing well” and being in a “very good place.” Powell also said the central bank was keeping a close eye on the coronavirus situation, which is continuing to affect the country’s travel and trade.

Tech stocks came under pressure after reports of the Federal Trade Commission (FTC) investigating some acquisitions. Shares of Facebook and Microsoft fell following the FTC news. Shares of healthcare and consumer discretionary companies led the day’s rally. The 10-year US Treasury yields increased, with the US dollar slipping for the first time in the last five sessions.

Why it matters: Despite the Chinese coronavirus outbreak claiming over 1,100 lives and affecting almost 45,000 people, US markets have been positive on the country’s economic outlook. Investors are also hopeful of the Fed lowering rates in case the virus causes a slowdown in growth. There are earnings releases scheduled for this week to keep the momentum going, provided the strong earnings session continues.

What to watch: The market will look at the Dow, Nasdaq and S&P 500, with stock futures pointing towards a higher start. Investors will also be keeping a close eye on Federal Reserve Chairman Jerome Powell’s testimony to the Senate Banking Committee today.

Other Markets: Most European indices were trading slightly higher on Wednesday, with the FTSE 100, IBEX 35 and Stoxx 600 up 0.1%, 0.1% and 0.1%, respectively.

Brazil’s retail sales, Indian industrial production and inflation rate, speeches from Federal Reserve Bank of Philadelphia President Patrick Harker and Francisco Federal Reserve Bank President Mary Daly, Energy Information Administration’s report on petroleum inventories in the US and the Treasury budget report.