Cisco Systems
posted better-than-expected financial results for its fiscal third quarter, and inched up its guidance for the July fiscal year. But a decline in orders sent shares 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 profits of $1 a share on an adjusted basis, and 78 cents under generally accepted accounting rules.
Cisco (ticker: CSCO) had projected revenue growth of 11% to 13%, non-GAAP earnings of 96 to 98 cents a share, and GAAP earnings of 74 to 79 cents.
For the fiscal fourth quarter, Cisco sees revenue up 14% to 16%, with non-GAAP profits of $1.05 to $1.07 a share, ahead of the Wall Street forecast for 14.1% growth and profits of $1.04 a share. Cisco now sees full-year revenue up 10% to 10.5%, with non-GAAP profits of $3.80 to $3.82 a share; previous guidance called for growth of 9% to 10.5% and profits of $3.73 to $3.78 a share.
The company said on its earnings call that orders were down 23%. Heading into the quarter, Wall Street analysts had been focused on company’s order progress.
In late trading, Cisco shares were down about 4.5%.
In an interview with Barron’s, Cisco CFO Scott Herren said there were three factors built in to the order decline, which compares with a 22% dip in the January quarter. One factor, he said, is that lead times have come down sharply as component availability has improved. He notes that lead times are down about 40% over the last two quarters. With shorter lead times, he says customers are less aggressive in their orders. A 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. Not least, he notes that the company is seeing an elongated sales cycle for both service providers and other large customers. “It’s a time to be prudent,” he says.
Herren says the company continues to expect to exit the July fiscal year with a backlog about twice the normal level, but he adds that the company should work the excess down to more typical levels by about the middle of the fiscal year.
The quarter overall was a strong one, Herren notes, with record performance in revenue, cash flow and profitabiity.
“We once again delivered a strong quarter in a dynamic environment,” CEO Chuck Robbins added in a statement. “In Q3, we delivered record revenue and double-digit growth in both software and subscription revenue. As key technologies like cloud, AI and security continue to scale, Cisco’s long-established leadership in networking, and the breadth of our portfolio position us well for the future.”
Herren notes also that Cisco bought back $1.25 billion of stock in the quarter, and expects a similar level in the July quarter and going forward.
Asked about the company’s view of the artificial intelligence market, Herren said that the company already has AI built into many of its security products, as well as in some collaboration and networking software. He also notes that training large language models require enormous computing power—and that Cisco can provide the network layer for that hardware. But he also notes that the development of AI remains in its early stages.
In a research note previewing the quarter, Evercore ISI analyst Amit Daryanani points out that Cisco shares were then down about 4% since reporting January quarter results, “likely driven by investors focusing more on order trends” than revenues and profits.
“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 wrote.
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.” His call now seems on the money.
UBS analyst David Vogt looked at the same subject in his preview note for the quarter. He pointed 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.
Write to Eric J. Savitz at eric.savitz@barrons.com
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