What to Expect When Cisco Systems Reports Earnings

Expectations are low going into Cisco Systems' (NASDAQ: CSCO) fiscal second-quarter report. The networking hardware giant expects the troubles of the first quarter to continue, with its guidance calling for a sizable year-over-year revenue decline, even after excluding divestitures.

Growth businesses like collaboration, data center, and security have helped the company grow in recent quarters despite weakness in the core switching and routing segments, but two of those businesses suffered declines during the first quarter.Here's what to look for when Cisco reports on Wednesday.

What analysts are expecting

The average analyst estimate calls for a year-over-year revenue decline of 3.2%, to $11.55 billion. That's near the midpoint of Cisco's guidance range -- a decline of 2% to 4%. Cisco's outlook excludes revenue from the SP Video CPE business, which the company agreed to sell back in 2015.

That deal closed in November 2015, about one month into the fiscal second quarter. The discrepancy between Cisco's reported and adjusted revenue in the second quarter will only include one month of that divested revenue, and the transaction will be fully lapped in the fiscal third quarter.

Image source: Cisco Systems.

Cisco reported a revenue decline of 3% and an adjusted revenue increase of 1% during the first quarter, so the company's second-quarter guidance represents a deterioration. The company pointed to global uncertainty, driven by the U.S. presidential election, as one reason for its weak guidance. Cisco isn't modeling any improvement going forward, but it does believe that business-friendly polices from the Trump administration could reverse some of these headwinds.

Cisco expects to produce GAAPearnings per share (EPS) between $0.42 and $0.47, and non-GAAP EPS between $0.55 and $0.57, during the second quarter. That compares to GAAP EPS of $0.62 and non-GAAP EPS of $0.57 during the prior-year period.

A $519 million tax benefit boosted GAAP EPS last year, so the steep decline called for in Cisco's guidance isn't something to worry about. Analysts are expecting non-GAAP EPS of $0.56, right at the midpoint of Cisco's guidance range.

Despite the weak numbers Cisco expects to report, it's likely that the company will announce a dividend boost along with its second-quarter report. Cisco announced a 24% increase to its quarterly dividend in February of last year, along with a massive $15 billion share-buyback authorization. Any dividend increase this year will almost certainly be smaller, but a high single-digit or low double-digit percentage boost would still be a nice reward for long-term investors.

Pay attention to the growth businesses

Cisco's first-quarter results, while beating analyst estimates, were disappointing due to the severe slowdown of the company's main growth businesses. The data center segment, which was growing by more than 20% annually as recently as late 2015, has now been weak for multiple quarters. The segment posted a 3% year-over-year decline during the first quarter, with the company blaming a shift from blade servers to rack servers for the disappointing performance.

The collaboration segment, which produces about $4.4 billion of revenue annually, has also slowed down. The segment grew by 9% during fiscal 2016, but the first quarter, saw a 3% year-over-year decline. One thing hurting the top line is Cisco's ongoing shift to subscription software. Collaboration-deferred revenue rose by 14% in the first quarter, and order growth was solid despite the revenue weakness.

The security business has managed to continue growing at a double-digit rate, driven, in part, by acquisitions. Security revenue expanded by 11% year over year during the first quarter, and investors should expect to see continued growth in the second quarter. This will help offset some of the weakness in other areas.

Cisco is a company in transition, shifting toward software and subscriptions while remaining dependent on sales of its core switching and routing hardware. The first quarter was lackluster, and the second quarter will be worse if Cisco hits its guidance. A likely dividend hike will provide some good news, but investors should be prepared for another weak quarterly report.

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Timothy Green owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.