- Cisco Systems fell sharply on Thursday after the IT networking giant revised its revenue guidance lower for the full year.
- The company cited a slowdown in new product orders in the first quarter of fiscal 2024.
- Lowered guidance is also having a ripple effect on other networking companies due to concerns within the industry or broader market sentiment.
Cisco Systems (NASDAQ:CSCO) lowered its revenue guidance for the full year, falling short of the average analyst estimate. The stock dropped more than 10% as the company said it is witnessing a slowdown in new product orders in the first quarter.
Accordingly, customer priorities are shifting towards installing and implementing products in their environments. This shift follows a period of exceptionally strong product delivery over the past three quarters.
Investors are also worried about the company’s projection that there are still one to two quarters' worth of shipped product orders awaiting implementation by its customers.
Bigger-Than-Expected Slowdown
Cisco was forced to slash its full-year revenue guidance as it is seeing weakening demand. The company now anticipated full-year revenue to be in the range of $53.8 billion and $55 billion, a meaningful revision compared to the prior range of $57 billion to $58.2 billion. The analyst consensus stands at $57.8 billion.
The full-year revision is a result of a very weak FQ2 outlook offered by Cisco. It expects to generate $12.6-12.8 billion in sales for the current quarter, while analysts were expecting as much as $14.2 billion.
The FQ2 earnings per share are projected at 83 cents while the full-year EPS is expected at $3.90, down from the prior forecast of $4.045. Wall Street was looking for 99 cents and $4.06, respectively.
Investors were also disappointed to hear that Cisco sees an adjusted operating margin of just 32% (up or down 50 basis points), which is much lower than the 36.6% reported for the first fiscal quarter and analyst expectations of 33.9% for FQ2.
“After customers implement large amounts of recently shipped productsssssss, we expect to see product order growth rates accelerate in the second half of the year. We are committed to delivering operating leverage and increasing capital returns to our shareholders," said Scott Herren, CFO of Cisco Systems.
For the first quarter, Cisco said its revenue rose 7.6% to $14.67 billion, matching the analyst consensus. Product revenue jumped 8.7% while networking revenue was $8.82 billion, up almost 10% on an annual basis.
The annual recurring revenue of $24.5 billion missed analyst expectations for $24.7 billion in ARR. Remaining performance obligations, an important financial metric for tech companies, stood at $34.8 billion at the end of the quarter. This is ahead of the $33.8 billion expected from the Street.
On the bottom line, Cisco posted a profit per share of $1.11, up from 86 cents reported for the same period last year and ahead of the consensus by 8 cents.
Chuck Robbins, chair and CEO of Cisco said:
"We had a solid start to fiscal 2024 with the strongest Q1 results in our history on both revenue and profitability,".
"We are confident in the foundational strength of our business and future growth opportunities fueled by AI, Security, Cloud, and Observability."
Splunk Acquisition and AI Push
Back in September, Cisco said it entered into an agreement to acquire cybersecurity firm Splunk (NASDAQ:SPLK) for approximately $28 billion. This marks Cisco's largest-ever deal and aims to bolster its software business, reducing its reliance on its networking equipment division.
The acquisition is expected to position Cisco to capitalize on the growing demand for artificial intelligence products as Splunk is recognized for its expertise in data observability, helping companies monitor systems for cybersecurity risks.
Cisco's offer of $157 in cash per share represents a 31% premium to Splunk's last closing price. The integration is expected to unlock the full potential of data, enhancing the security and digital resilience of organizations of all sizes.
The idea behind the deal is that Splunk's security capabilities will complement Cisco's existing portfolio, creating a comprehensive offering that spans from devices to applications to cloud environments. Robbins said:
“Our combined capabilities will drive the next generation of AI-enabled security and observability,”
“From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient.”
During the earnings call, Robbins said the company has made further progress in the areas of generative AI, cloud, security, and full-stack observability, resulting in a new market share. Three out of the top 4 customers have deployed Cisco’s hyperscale Ethernet AI fabric.
“We also already have line of sight to over $1 billion in orders for AI infrastructure from major cloud providers in fiscal year '25,” the chief executive said on the call.
Cisco's recent financial results stand in contrast to its rivals Juniper Networks (NYSE:JNPR) and Arista Networks (NYSE:ANET), both of which reported positive earnings last month, driven by robust enterprise spending.
It is likely that the weakness in share price following the release of FQ1 results is also a result of big investors shifting their preference towards Juniper and Arista as Cisco sees the current headwinds persisting for a few more quarters.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.