Cisco stock drops when orders are rejected

Cisco Systems posted better-than-expected financial results for the fiscal third quarter, and increased its guidance for the fiscal year in July. But the decline in orders pushed the stocks sharply lower in late trading.

For the quarter ended April 29, the company reported revenue of $14.6 billion, up 14% from a year ago, with earnings of $1 per share on an adjusted basis, 78 cents under GAAP.

Cisco (stock ticker: CSCO) forecast revenue growth of 11% to 13%, non-GAAP earnings of 96 to 98 cents per share, and GAAP earnings of 74 to 79 cents.

For the fiscal fourth quarter, Cisco expects revenue to grow 14% to 16%, with non-GAAP earnings of $1.05 to $1.07 per share, ahead of Wall Street expectations for growth of 14.1% and earnings of $1.04 per share. Cisco now sees full-year revenue up 10% to 10.5%, with non-GAAP earnings of $3.80 to $3.82 per share; Previous guidance called for growth of 9% to 10.5% and earnings of $3.73 to $3.78 per share.

The company said on its earnings call that orders fell 23%. Heading into the quarter, Wall Street analysts have been focusing on the company’s order progress.

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In late trading, Cisco shares fell by about 4.5%.

In an interview with BarronCisco CFO Scott Herren said there were three factors built into the decline in demand, compared to a decline of 22% in the January quarter. One factor, he said, is that lead times have fallen sharply as component availability has improved. He notes that lead times have decreased by 40% over the past two quarters. With shorter lead times, he says customers are less aggressive with their orders. The second factor, Herren said, is that the company’s improved ability to ship products means some customers are in a digestion period, working through completed orders. At the very least, he notes, the company is experiencing a lengthy sales cycle to both service providers and other large customers. “It’s time to be wise,” he says.

Herren says the company still expects to exit fiscal July with a backlog of about twice the normal level, but adds that the company should taper the increase to more typical levels by about the middle of the fiscal year.

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The quarter overall was strong, Herren notes, with record performance in revenue, cash flow and profitability.

“We once again delivered a strong quarter in a dynamic environment,” CEO Chuck Robbins added in a statement. “In the third quarter, we delivered record revenue and double-digit growth in both software and subscription revenue. As we continue to expand in key technologies such as cloud, AI and security, Cisco’s solid leadership in networking and the breadth of our portfolio positions us well for the future.”

Herren also notes that Cisco repurchased $1.25 billion in shares in the quarter, and expects a similar level in the July quarter going forward.

Asked about the company’s view of the AI ​​market, Herren said the company already has AI built into many of its security products, as well as into some collaboration and networking software. He also points out that training large language models requires enormous computing power — and that Cisco can provide the network layer for those machines. But he also points out that the development of artificial intelligence is still in its infancy.

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In a research note previewing the quarter, Evercore ISI analyst Amit Daryanani noted that Cisco shares have subsequently fallen about 4% since reporting results for the January quarter, “likely driven by investors focusing more on demand trends.” of revenue and profits.

“There is a fair amount of investor concern about true demand levels for enterprise networks and whether we could see a dip in 2024 as the backlog decreases,” the analyst wrote.

Almost every analyst who follows Cisco has focused on the same issue when looking at financial results for the third quarter of the fiscal year ending in April.

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JP Morgan analyst Samik Chatterjee made a similar point in his earnings preview note, emphasizing that Street would likely ignore even a potential push to the company’s guidance for the July 2023 fiscal year — and focus instead on orders. He says another quarter of orders falling 22% or more “would be seen as conclusive evidence against the backdrop of much weaker demand”. It seems that his call is now on the money.

UBS analyst David Vogt looked at the same topic in his preview note for the quarter. He noted that while “comp” order growth eased by about 25 percentage points in the April quarter, “there is a growing risk that the expected moderation in the demand decline from 22% in the last quarter will not materialize.” To the point of Vogt, orders for Cisco products increased 33% in the January 2022 quarter, while they moderated to 8% growth in the April 2022 period.

Write to Eric J. Savitz at [email protected]

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