Weak CSCO forward guidance points to weakness in other sectors: AI traffic and Machine Learning at the Edge should be driving greater digital data traffic, so should 5G as all the extra capacity if being used up eventually turns to traffic over existing land based networks. This is where CSCO excels.
The AI land run may not be what analysts are predicting. MSFT noted a easing of the lack of supply of AI chips. It is suggested that NVDA earnings will include a lot of revenue bump up from Chinese companies buying in advance of the ban, but will forward guidance lag due to the slower deployment of AI in products - due to the time needed to integrate and the lack of a innovation companies will actually pay serious money for. At the end of the day AI is an advantage in certain verticals but only a novelty in others.
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Cisco Orders Soared After Covid. Now The Company Is Dealing With the Fallout.
By Eric J. Savitz
Nov. 17, 2023 11:08 am ET
Shares of Cisco are flat this year, well behind the Nasdaq’s 35% rise.
ANGEL GARCIA/BLOOMBERG
Some companies still can’t seem to shake Covid. This past week, Cisco Systems stunned Wall Street with a terrible outlook tied directly to pandemic fallout.
Cisco ’s (ticker: CSCO) October-quarter results were fine. Revenue was $14.7 billion, up 8% and at the high end of the company’s guidance range. Adjusted profit was $1.11 a share, eight cents above Wall Street’s forecast. But the good news basically ended right there.
Product orders fell 20% in the quarter, including a 32% decline in orders from telecom and cloud customers, and a 26% slide from enterprise customers. Orders, of course, eventually turn into revenue. Seeing a 20% decline isn’t promising.
The stock fell nearly 10% on Thursday following the news. It’s roughly flat on the year, well behind the Nasdaq’s 35% rise.
The midpoint of Cisco’s guidance for its January quarter calls for revenue of $12.7 billion, down 6.6% from a year ago, missing consensus by $1.5 billion. Cisco also chopped its revenue outlook for the July 2024 fiscal year by about $3 billion, implying a decline of 5%. And the company basically blamed it all on the pandemic.
During Covid, Cisco’s revenue tumbled as component shortages and logistics logjams hampered the company’s ability to deliver products. Revenue fell more than 9% in both the July and October quarters of 2020. But as orders piled up, Cisco’s backlog soared.
In the last few quarters, those component problems were solved, freeing the company to produce more routers, switches, and the like. Revenue spiked 14% in the April quarter and 16% in the July quarter. But the backlog has been worked off. No more free lunch.
The strong recent performance reflected a surge in the company’s ability to ship products, not new demand. And now, Cisco’s customers have more than they need. Cisco says there are one or two quarters worth of shipped products at customer sites waiting to be installed.
Chief Financial Officer Scott Herren told me that Cisco didn’t see any change in macroeconomic conditions in the latest quarter, although order-approval cycles remain elongated. “This was much more about the enormous amount of product that we’ve shipped out the door,” he says.
But the huge miss raises some questions. For one thing, why didn’t Cisco see this coming? Oppenheimer analyst Ittai Kidron calls it “uncharacteristic misexecution.”
Additionally, what does the pileup in customer inventories say more broadly about ongoing demand? No one knows if customers will start ordering again once this period of digestion is completed.
New Street Research analyst Pierre Ferragu cut his rating on Cisco shares to Neutral from Buy after the revised outlook.
“Management sees it as customers taking time to deploy recently delivered orders,” he wrote. “We are more cautious: orders have now trended well below revenues for a year, and near-term IT spending trends are uncertain.”
On its earnings call, Cisco said orders should start to rebound in the coming quarters, but the stock’s sharp selloff shows that investors have their doubts.
“We remain concerned this cut might not be the last,” wrote UBS analyst David Vogt, who has a Neutral rating on Cisco shares. He sees “building macro pressures.”
The case for bottom-fishing here is that Cisco shares have become dirt cheap. The stock now trades at just 12 times expected fiscal 2024 earnings, and 3.5 times forward revenues. There’s a 3% yield, and Cisco has committed to buying back $1.25 billion of stock every quarter. But until Cisco offers more evidence about a rebound in orders, the stock is likely to struggle—no matter how cheap it may be.
Write to Eric J. Savitz at eric.savitz@barrons.com
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