Cisco Has a Lot to Prove Today

Networking hardware giant Cisco Systems (CSCO -0.35%) will report its fiscal second-quarter results after the market closes today. The company has so far been unaffected by tariffs and global economic uncertainty, but that could change in 2019. Cisco expects to report another quarter of solid growth, but its guidance may not be quite as rosy.

What happened last time

Cisco grew revenue for the fourth consecutive quarter in its fiscal first quarter, posting its strongest growth rate in years. Earnings per share also soared, driven by higher revenue, lower operating costs, and share buybacks.

Data source: Cisco. GAAP = generally accepted accounting principles.

All of Cisco's core product segments posted double-digit or near-double-digit growth. Infrastructure platforms, by far the largest segment, grew revenue by 9% year over year to $7.6 billion. Applications revenue jumped 18% to $1.4 billion, and security revenue rose 11% to $651 million. Services revenue grew at a slower 3% rate, reaching $3.2 billion.

Cisco didn't feel any real impact from U.S. tariffs on Chinese goods during the first quarter. CEO Chuck Robbins called the tariffs immaterial, and he said that he didn't see many customers pulling forward orders to avoid higher prices. The tariff rate is currently 10% on a long list of products from China. That rate was originally scheduled to rise to 25% at the beginning of the year, but the increase was pushed back to March 2.

Cisco's earnings growth was helped by the company's massive share buyback program. Cisco spent more than $5 billion on share buybacks in the first quarter alone. The total diluted share count was down 7.6% year over year in the first quarter, providing a significant boost to the per-share numbers.

Check out the latest Cisco earnings call transcript.

Image source: Cisco.

What analysts are expecting

Cisco expects to grow revenue by between 5% and 7% in the fiscal second quarter, excluding the impact of the divestiture of the service provider video software solutions business. Cisco's guidance is in line with the average analyst estimate if that $230 million of divested revenue is backed out.

Data source: Yahoo! Finance.

Analysts at Morgan Stanley expect Cisco's growth to slow down, and downgraded the stock from overweight to equal-weight on Tuesday. Morgan Stanley expects security sales to flatten, which will make it difficult for Cisco to offset any slowdown in hardware sales. The price target on the stock was dropped from $51 per share to $49 per share.

Other analysts aren't as pessimistic. Raymond James analyst Simon Leopold thinks Cisco stock could rise another 10%, citing solid demand from the company's enterprise clients. China represents less than 2% of Cisco's business, according to the analyst, so slowing economic growth in China is largely a nonissue for the company. Raymond James rates Cisco as outperform, and has a $52 price target on the stock.

Economic uncertainty

Because Cisco's customers are large organizations and governments, the company is highly sensitive to the global economic environment. Economic uncertainty can lead its customers to delay orders, which in turn hurts Cisco's sales. There hasn't been any sign of this yet in Cisco's results, but that could change this year.

Cisco has shifted toward software, services, and subscriptions in recent years, which could help the company's results hold up better than in the past when global economic uncertainty hits. But Cisco still depends on sales of switching and routing hardware for most of its revenue, and it will be difficult to offset slumping sales of those core products.

If Cisco can provide decent guidance, it would go a long way toward reassuring investors that demand remains strong despite tariffs and other global economic developments. If not, the stock could start heading lower.