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Cisco (NASDAQ:CSCO) shares fell in premarket trading on Thursday after it issued weaker-than-expected guidance, though some on Wall Street see it as nothing more than just a return to the growth rates of the past.
The weaker-than-expected guidance is due to the “digestion” of historical orders, analysts at Bank of America said.
“The market is digesting historical abnormal orders, and the growth areas are either not growing or too small to make an impact, with Security up only 3% and Observability up 16% YoY, yet only at a combined 9.1% of revenue,” they wrote in a note. “On the positive side, the stock already reflects most of these risks, margins are solid, trends should recover by 4Q where expectations seem low, and we believe improvement in demand for infrastructure gear, together with improving impact of the growth initiatives should help the momentum into [fiscal 2025].” The analysts reiterated their Neutral rating and $55 price target.
Customers are also taking longer to digest the inventory surplus in networking products after Cisco shipped a large order volume from its backlog, JMP Securities analyst Erik Suppiger, who reiterated his Market Perform rating on the stock after the results, said.
There may also be some concerns about the global economy, as some of Cisco’s customers have become more cautious, Morgan Stanley analyst Meta Marshall said.
“Whether for macro, AI planning or simply still working through inventory, Cisco’s expectations for demand in the 2H came down meaningfully (now expecting revenue to be -9% for FY24 vs. -4% previously),” Marshall wrote in a note. Marshall has an In-Line rating on Cisco.
Cisco was more optimistic on the service provider side that they could see a step back in spending in the first and second-halves of the year, but results from Juniper Networks (JNPR), Corning (GLW), optical networking companies and Viavi Solutions (VIAV) “would point to a still muted spend environment that isn’t expected to return to spend until at least the 2H’CY24 / 1H’25,” Marshall added.
Looking to the fiscal third-quarter, Cisco (CSCO) expects to earn between $0.84 and $0.86 per share, with revenue expected to fall between $12.1B and $12.3B. Analysts had expected adjusted earnings of $0.92 per share on $13.09B in sales.
Cisco also provided fiscal 2024 guidance, saying it expects to earn between $3.68 and $3.74 per share on adjusted basis, with revenue between $51.5B and $52.5B. Analysts were expecting full-year earnings of $3.86 per share on $54.41B in revenue.
Second-quarter results
The guidance shortfall comes after the Chuck Robbins-led Cisco (CSCO) earned an adjusted $0.87 per share on $12.79B in revenue during its fiscal second-quarter, including $9.23B from product revenue. Adjusted gross margins for the period came in at 66.7%.
The company ended the period with $35.7B in remaining performance obligations, up 12% year-over-year.
A consensus of analysts expected Cisco (CSCO) to earn an adjusted $0.84 per share on $12.7B in revenue, down roughly 5.9% from the year-ago period.
Layoffs
Separately on Wednesday, Cisco said it would let go approximately 5% of its workforce as it looks to realign its organization to focus on growth areas.
The company expects to recognize roughly $800M in charges associated with the restructuring, mostly related to severance and other one-time termination benefits. The majority of the costs are expected to occur in the third-quarter, where it will recognize roughly $500M in costs. Approximately $150M will be recognized in the fiscal fourth-quarter and the remainder will come through the first-half of fiscal 2025.
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