Cisco Systems Inc., the leading manufacturer of computer networking equipment, witnessed a sharp decline in its stock value during late trading following a lacklustre forecast. This has raised worries about a potential contraction in corporate technology expenditures. The company projected sales of $12.6 billion to $12.8 billion for the period ending in January, significantly below the $14.2 billion estimated by analysts. In terms of profit, Cisco anticipated earnings of 82 to 84 cents per share, compared to the predicted 99 cents when excluding certain items.
After the announcement, Cisco’s shares experienced a substantial 16% drop in extended trading, eventually recovering to an 11% decrease. Despite a 12% increase throughout 2023, closing at $53.28 on Wednesday, the disappointing forecast had an immediate impact.
The report highlights a slowdown in orders for networking hardware, indicating a strain on growth. CEO Chuck Robbins is working to reduce the company’s reliance on one-time equipment sales by focusing on software and services, particularly in the realm of security. However, this transition is not yet sufficient to shield Cisco from the impact of reductions in corporate spending budgets.
Robbins clarified that the macroeconomy hasn’t weakened, attributing the order slowdown (a 21% decrease in the first quarter) to customers taking a break from new orders to install previously received equipment. He emphasized that the company had recently cleared a significant backlog, resulting in a higher volume of equipment shipped than usual.
Cisco expects the weak order environment to persist, estimating that one to two quarters of shipped product orders are still awaiting implementation by customers. Despite this, there is optimism that sales will rebound in the latter half of the year, especially after customers implement large quantities of recently shipped products.
The company is actively diversifying its business by acquiring data-crunching software maker Splunk Inc. for $28 billion. This move aims to provide Cisco with additional services for corporate customers, including network health monitoring and cybersecurity risk assessment. The acquisition is anticipated to be finalized by the end of the third quarter of calendar year 2024.
Cisco’s adjusted gross margin is expected to be 65% to 66% this quarter, aligning with estimates. Fiscal 2024 sales are projected to be between $53.8 billion and $55 billion, down from the earlier forecast of up to $58 billion. Analysts, on average, had estimated around $58 billion, according to a Bloomberg survey.
In the fiscal first quarter, which concluded on October 28, Cisco reported an 8% increase in revenue to $14.7 billion, with earnings of $1.11 per share (excluding certain items). This outperformed the estimated revenue of $14.6 billion and earnings of $1.03 per share.
While acknowledging the current challenges, Cisco emphasized its positive position resulting from spending on artificial intelligence systems. The company revealed it is securing orders from large enterprises expanding their infrastructure for increased AI computing, with approximately $1 billion worth of such orders—double the figure from three months ago.
Chief Financial Officer Scott Herren noted progress in generating more revenue from software and services, with 44% of sales now coming from recurring sources, a figure on the rise. The Splunk acquisition is expected to significantly contribute to further elevating this proportion.
