When
Cisco Systems
reports financial reports after the close Wednesday, the focus is going to be not on revenue and profits, but instead on orders. Wall Street sees that as the best indicator of underlying demand and growth for the networking systems provider.
In a research note previewing the quarter, Evercore ISI analyst Amit Daryanani points out that Cisco (ticker: CSCO) shares are down about 4% since reporting January quarter results, “likely driven by investors focusing more on order trends than revenue growth.”
In the January quarter, Cisco reported that orders were down 22% from the year-ago period, after seeing 30%-plus growth for several consecutive quarters.
“There is a fair bit of investor concern around true demand levels for enterprise networking and whether we could see a downturn in 2024 as backlog declines,” the analyst writes.
Daryanani says the “bogey” for Cisco could be the 30% order decline that
Juniper Networks
(JNPR) posted in the most recent quarter. A decline of less than that, he contends, should allow Cisco stock to move higher—he says the figure will be comparable with the last quarter, in the low 20% range.
Almost every analyst who follows Cisco has focused on the same issue when looking ahead to financial results for the fiscal third quarter ended in April.
J.P. Morgan analyst Samik Chatterjee made a similar point in his own earnings preview note, asserting that the Street is likely to ignore even a potential boost to the company’s July 2023 fiscal year guidance—and focus instead on orders. He says another quarter of orders dropping 22% or more “will be seen as definitive proof of a much weaker demand backdrop.”
UBS analyst David Vogt looks at the same subject in his preview note for the quarter. He points out that while the order growth “comp” is about 25 percentage points easier in the April quarter, “there is increased risk that the expected moderation of order declines from 22% last quarter does not materialize.” To Vogt’s point, Cisco’s product orders were up 33% in the January 2022 quarter, while moderating to 8% growth in the April 2022 period.
For the April quarter, Cisco projects revenue growth of 11% to 13%, which implies $14.4 billion—right where the Street consensus forecast sits. Cisco projects non-GAAP earnings of 96 to 98 cents a share, while consensus splits the difference at 97 cents. The company forecasts profits under generally accepted accounting principles between 74 to 79 cents, bracketing the Street forecast at 78 cents. Cisco sees non-GAAP gross margin in the quarter between 63.5% and 64.5%.
Other noteworthy Street forecasts call for billings of $13.8 billion, and annual recurring revenue, or ARR, of $24.2 billion.
For the July quarter, the Street projects $14.95 billion in revenue, up 14.1%, with non-GAAP earnings of $1.04 a share, and GAAP profits of 84 cents a share.
For the July 2023 fiscal year, Cisco has projected revenue growth between 9% and 10.5%, or about $56.6 billion at the midpoint of the range. The company has guided for full-year earnings between $3.73 and $3.78 a share on an adjusted basis, and between $2.85 and $2.96 a share on a GAAP basis.
Cisco shares are down about 1% so far this year.
Write to Eric J. Savitz at eric.savitz@barrons.com
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