UPDATED 19:35 EDT / MAY 17 2023

INFRA

Cisco beats expectations but its stock falls on sluggish demand

Cisco Systems Inc. delivered solid quarterly earnings and revenue beats today, but executives revealed that orders were down on an annual basis, sending its stock lower in extended trading.

The company reported fiscal third-quarter net income of $3.2 billion, up 6% from a year earlier. Earnings before certain costs such as stock compensation came to $1 per share, while revenue increased 14%, to $14.57 billion. The results were better than expected, with analysts forecasting earnings of 97 cents per share on revenue of $14.4 billion.

Cisco Chairman and Chief Executive Chuck Robbins (pictured) said the company delivered a strong quarter in what was a dynamic environment. “In Q3, we delivered record revenue and double-digit growth in both software and subscription revenue,” he said. “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.”

There were some encouraging signs in terms of growth for Cisco, with its product revenue rising 17%, to $11.1 billion, and services gaining 3%, to $3.5 billion.

Most of the product revenue came from Cisco’s Secure, Agile Networks business unit, which includes its main product line of networking switches, which delivered $7.5 billion in sales, up 29% from a year earlier. Internet for the Future, which includes routed optical networking hardware, generated $1.39 billion in sales, up 5%. End-to-End Security added an additional $958 million, up 2%, while Optimized Application Experiences pulled in $204 million, up 12%. The only blot was Cisco’s Collaboration business, which includes Webex, whose revenue fell 13%, to $985 million.

For the fourth quarter, Cisco executives said they’re targeting earnings of between $1.05 and $1.07 per share with revenue growth of between 14% and 16%, which suggests sales of $15.07 billion at the midpoint. Wall Street had forecast earnings of $1.04 per share on revenue of $14.95 billion.

However, analysts were more concerned about the company’s annual revenue growth, and Cisco had somewhat disappointing news. Analysts had been hoping Cisco executives might raise their ceiling on full year revenue growth, but that didn’t happen. Instead, Cisco offered a full-year revenue growth target of between 10% and 10.5%, compared with its previous range of 9% to 10.5% three months ago.

The guidance was disappointing because Cisco has reported strong results in recent months. However, there are concerns that Cisco’s growth is being driven primarily by a backlog of orders that built up during the coronavirus pandemic, when the company was struggling to obtain the components it needed to ship its products. Analysts fear that Cisco is using this backlog to cover up a significant decline in new orders.

Those fears were stoked when Cisco’s finance chief Scott Herren revealed that new orders declined by 23% in the quarter from a year earlier.

“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 90 days’ time,” JP Morgan analysts wrote in a preview of the report.

Robbins tried his best to put the decline into perspective. “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.”

Analyst Charles King told SiliconANGLE that Cisco’s situation is probably similar to that of many other big tech companies that are struggling with today’s economy.

“The good news is that the component shortages that slammed vendors early in the COVID pandemic have eased,” King said. “The bad news is that enterprise customers are feeling less pressure to order products. Plus, they are being prudent in case continuing worries about an economic downturn eventually turn out to be correct. The shortfall in new orders is likely making some investors more cautious.”

Holger Mueller of Constellation Research Inc. had a different opinion, saying that Cisco did well across the board, with the exception of its collaboration business. “Cisco’s main problem is that its costs have grown faster than its revenue has, and that indicates that the management was expecting faster growth than what occurred,” Mueller added. “Investors will be watching Cisco’s fourth quarter performance closely to see how it closes the fiscal year.”

Cisco’s stock initially climbed just over 1% in the after-hours trading session, but fell more than 4% later.

Photo: Robert Hof/SiliconANGLE

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