Cisco
Systems posted solid results for the January quarter, but the networking giant provided guidance for the next two quarters that fell well short of Wall Street estimates.
The company also announced that it plans to reduce its workforce by about 5% as part of a restructuring plan “in order to realign the organization and enable further investment in key priority areas.” The company said the plan would result in about $800 million in charges for severance and other costs. The cuts will affect a little over 4,000 workers.
Cisco continues to deal with a pileup of networking hardware inventory held by its customers. The company had warned in reporting October quarter results that an inventory glut at customers would result in slower shipments for at least a quarter or two. That trend seems to have continued, based on the company’s January results and its guidance.
On the company’s call with analysts, CEO Chuck Robbins said Cisco is seeing “a greater degree of caution and scrutiny of deals” given an uncertain environment. He said it’s taking longer than expected for companies to clear their inventory and that the process would still take another quarter or two. Cisco is also seeing weak demand from cloud, telecom and cable customers, Robbins said.
CFO Scott Herren noted that there’s progress on the inventory side in wireless hardware, but that progress is slower in switching, a problem he says is at least partially due to a tight supply of skilled labor to handle installations. He also notes that “webscale” customers—who had been the most aggressive in ordering gear when supplies were tight—have “upwards of 20 weeks of inventory.”
The stock was down 3.9% on Thursday, the morning after the report.
For the January quarter, Cisco reported revenue of $12.8 billion, down 6% from year ago, but slightly above Wall Street’s consensus of $12.7 billion. Adjusted profits were 87 cents a share in the quarter, topping analysts’ estimate of 84 cents as tracked by FactSet.
While the company saw growth in its security, collaboration, and observability segments in the quarter, its core networking business saw revenue decline 12% to $7.08 billion. Overall product revenue was down 9%, while services revenue was up 3.5%.
Revenue was down 4% in the Americas, 7% in EMEA (Europe, Middle East and Africa) and 12% in APJC (Asia-Pacific, Japan and China.)
The company said product orders were down 12% from a year ago. Last quarter said it had “line of sight” on $1 billion in orders related to AI workloads—Herren says that figure has since tripled to about $3 billion. He says that doesn’t include business tied to its joint venture with
Nvidia,
which is more targeted on corporate data center customers.
For the April quarter, Cisco sees revenue ranging from $12.1 billion to $12.3 billion, down about 16% from a year ago at the middle of the range, and well below the Wall Street consensus of $13.1 billion. The company sees adjusted profits for the quarter of 84 to 86 cents a share, short of consensus at 92 cents
For the July 2024 fiscal year, the company now sees revenue of between $51.5 billion to $52.5 billion, down 9% at the middle of the range, and reduced from a prior forecast of $53.8 billion to $55 billion. Cisco forecast full-year adjusted profits of between $3.68 and $3.74 a share, down from a prior range of $3.87 to $3.93 a share.
Cisco also announced a 3% increase in its quarterly dividend rate to 40 cents, up from 39 cents. The company bought back $1.3 billion of stock in the latest quarter.
Cisco also said it expects to close its pending acquisition of
Splunk
in the current fiscal quarter, which is about two quarters ahead of expectations. The current guidance doesn’t reflect any contribution from Splunk.
“We expect networking to remain pressured and believe the weakness will be visible on Cisco’s results,” BofA Global Research analyst Tal Liani wrote in a note previewing the quarter. Liani maintains a Neutral rating and $50 target price on Cisco shares. With product orders falling and the backlog “largely depleted,” he projected product revenue falling 9% (an accurate call as it turns out), 13% and 12%, in the next three quarters, respectively.
Evercore ISI analyst Amit Daryanani kept an Outperform rating and $55 target price on Cisco shares heading into the earnings announcement, but wrote that he is cautious on the stock heading into the report, “given the slowdown in the enterprise networking market that was flagged by a number of peers and channel partners.” He wrote that consensus estimates will have to fall to remove the risk of a disappointment in the second half of Cisco’s fiscal year.
Write to Eric J. Savitz at [email protected]
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