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Challenges in the Networking Equipment Industry

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Cisco Systems, a leading provider of networking equipment, recently shared disappointing financial results with Wall Street. The company issued a warning to investors, explaining that a buildup of inventory held by customers would inevitably lead to slower shipments of networking equipment for the next quarter or two. As a result, expectations for Cisco’s January quarter results are understandably cautious.

The management at Cisco has forecasted revenue between $12.6 billion and $12.8 billion for the quarter. This range indicates a 6.6% decline from the previous year’s results. In terms of adjusted profits, Cisco expects to earn 82 to 84 cents per share. However, the consensus forecast among industry experts suggests revenue of $12.7 billion and adjusted profits of 84 cents per share.

The official numbers will be released after the close of trading on Wednesday.

During the announcement of its October quarter results, Cisco attributed the slowdown in new orders to a post-pandemic ripple effect. The company explained that its supply chain had loosened, resulting in the shipment of a significant backlog of orders accumulated over the past couple of years.

Cisco stated, “Customers are currently focused on installing and implementing products in their environments following exceptionally strong product delivery over the past three quarters.” The company estimates that it still has one to two quarters of shipped product orders waiting to be implemented by customers.

CFO Scott Herren addressed this issue in an interview last quarter, stating that there was no significant change in macroeconomic conditions during that period. However, order approvals were slower. Herren emphasized, “This was much more about the enormous amount of product that we’ve shipped out the door.” In fact, Cisco’s product orders experienced a 20% decline in the October quarter.

Looking ahead to the April quarter, industry analysts predict revenue of $13.1 billion, down 10.2% compared to the previous year, with an adjusted profit of 92 cents per share. Despite the challenges, Cisco Systems remains a dominant player in the networking equipment industry.

Cisco Projects Lower Revenue for July 2024 Fiscal Year

Cisco has provided guidance for the July 2024 fiscal year, expecting a decrease in revenue of nearly 5%. The projected revenue range is between $53.8 billion and $55 billion, accompanied by adjusted profits of $3.87 to $3.93 per share. On the other hand, analysts surveyed by FactSet anticipate revenue of $54.4 billion and adjusted profits of $3.86 per share.

Analysts Urge Caution on Cisco’s Performance

Analysts are showing caution regarding Cisco’s performance in the upcoming quarter. The stock closed at $49.64 on Tuesday, experiencing a year-to-date decline of 1.7%. Although it has seen a 4.1% increase in the past 12 months, concerns persist.

In a preview note, BofA Global Research analyst Tal Liani expressed his expectations for Cisco’s results. He believes networking will continue to face pressure and predicts a visible weakness in Cisco’s performance. Liani maintains a Neutral rating and a $50 target price for Cisco shares. Anticipating a decline in product revenue in the next three quarters, he estimates drops of 9%, 13%, and 12% respectively, as product orders decrease and the backlog becomes largely depleted.

Enterprise Networking Market Slowdown Raises Concerns

Amit Daryanani, an analyst from Evercore ISI, retains an Outperform rating for Cisco shares. However, he expressed caution regarding the stock leading up to the earnings announcement. The slowdown observed in the enterprise networking market by several peers and channel partners raises red flags for him. In order to eliminate potential risks for Cisco’s fiscal year’s second half, Daryanani suggests that consensus estimates will need revision.

Daryanani identifies a potential positive for Cisco if the company remains optimistic about AI-related data centers and provides more concrete revenue figures for fiscal year 2025.

Cost-Cutting Measures May Provide Relief

Cisco may find some relief through cost-cutting measures. In recent news, it was revealed that the company plans to eliminate “thousands of jobs” in order to refocus on areas of high growth. However, Cisco has opted not to comment on the report provided by Reuters.

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