Earnings Results: Cisco earnings beat, but the stock is falling on concerns about declining orders

Daily Trade

Cisco did not reduce its full-year revenue forecast, as a previous version of this article indicated. It has been updated.

Cisco Systems Inc. beat expectations for quarterly profit and sales in a report Wednesday, but executives did not increase their top target for annual revenue and revealed that orders declined again, sending shares down 4% in late trading.

Cisco 
CSCO,
+1.51%

posted fiscal third-quarter net income of $3.2 billion, or 78 cents a share, on revenue of $14.57 billion, up from $12.84 billion a year ago. After adjusting for stock-based compensation and other costs, Cisco reported earnings of $1 a share, up from 87 cents a share in the same quarter a year ago.

Analysts surveyed by FactSet on average expected adjusted net income of 97 cents a share on revenue of $14.4 billion. Shares fell 4% in after hours trading after closing up 1.5% in regular trading Wednesday at $47.63.

For the fiscal fourth quarter, Cisco executives guided for adjusted earnings of $1.05 to $1.07 a share in adjusted profit and revenue growth of 14% to 16%, which would lead to sales of $15.07 billion at the midpoint. Analysts were forecasting adjusted earnings of $1.04 a share and revenue of $14.95 billion, according to FactSet.

Executives also increased their annual profit guidance, but did not raise their ceiling on revenue growth for the year, as some analysts expected. Cisco executives now expect adjusted earnings of $3.80 to $3.82 a share, after previously stating a range of $3.72 to $3.78 a share, while providing a full-year revenue-growth target of 10% to 10.5%. Three months ago, they guided for full-year revenue growth of 9% to 10.5%.

“Our healthy backlog, recurring revenue streams and RPO, as well as the improving availability of supply, underpin our confidence to increase full-year guidance,” Cisco Chief Financial Officer Scott Herren said in a statement Wednesday. In an interview, he said supply chain issues are easing though backlog remains roughly double its normal size.

Analysts were expecting an increase to Cisco’s full-year revenue forecast after the company reported strong results in recent months, following issues last year with obtaining enough components to ship its equipment. But that dynamic has led to some agitation, as analysts argue that declining orders are being papered over by a backlog that developed during those delays, creating concerns about demand in the coming months that may not be answered until executives offer guidance for next fiscal year.

For more: Cisco stock adds more than $10 billion in a day, but is supply or demand driving strong performance?

“The revenue and earnings results and even a potential raise to revenue guidance for FY23 might not really matter much into the upcoming earnings print as the bigger focus will be on orders and the implications thereof in relation to guidance for top-line growth in FY24 to be issued in another ninety days time,” JP Morgan analysts wrote in a preview of the report. “In summary, we believe the ‘bogey’ for investors will be the -22% y/y decline in orders, which if repeated this quarter, despite much easier comps, will be seen as definitive proof of a much weaker demand backdrop.”

After that 22% decline last quarter spooked analysts, Herren said in a conference call Wednesday that orders declined 23% in the most recent quarter. Chief Executive Chuck Robbins attempted to put that performance into context in his prepared remarks.

“Given the unprecedented demand for our technology during the pandemic, we believe sequential order rates are far more informative than year-over-year rates,” he said. “Just like the prior two quarters, our sequentials in Q3 were in general alignment with historical ranges, coming in one point below the historical range.”

Robbins said Cisco foresees modest revenue growth in fiscal 2024 “on top of our strong performance in fiscal 2023.” 

“You can also expect us to deliver earnings per share at a higher growth rate than revenue in Q4 and in fiscal 2024, reflecting improving gross margins and strong expense management that will be important,” Robbins added.

Cisco’s Product ($11.1 billion) and Service ($3.5 billion) businesses were up year over year. Analysts on average expected product revenue of $10.9 billion, according to FactSet.

Shares of Cisco are flat this year, while the broader S&P 500 index
SPX,
+1.19%

is up 8%.

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