After a mixed start to FY24, Cisco Systems (CSCO) sees demand slowdown

Network gear maker Cisco Systems, Inc. (NASDAQ: CSCO) entered fiscal 2024 on a mixed note, reporting better-than-expected first-quarter numbers and slashing its full-year guidance. Soon after the announcement, the company’s stock suffered the biggest single-day loss in about a year as the management’s cautious outlook dragged down investor confidence.  

Post earnings, the stock slipped below its long-term average and to a five-month low, reversing most of this year’s gains. Over the years, Cisco has hiked its quarterly dividend regularly and currently offers a yield of more than 3%, which is above the S&P 500 average.

Weak Demand

The management sees a slowdown in the demand for networking products as customers take time to onboard and deploy product deliveries. According to the company, customers are currently installing and implementing products after the exceptionally strong delivery in the past three quarters. Taking a cue from the muted order inflows, Cisco slashed its full-year adjusted earnings per share guidance to $3.87-$3.93 from the earlier outlook of $4.01-4.08. Currently, it expects 2024 revenue to be in the $53.8-$55.0 billion range, compared to the earlier forecast of $57-$58.2 billion.

Cisco’s CEO Chuck Robbins said during the earnings call: After three quarters of exceptionally strong product delivery, our customers are now focused on installing and implementing these unprecedented levels of products. The bottleneck that we previously saw in the supply chain has now shifted downstream to implementation by our customers and partners. Our order lead times and backlog have largely returned to normal levels. As deliveries rose, the channel inventory we track at our distributors also steadily declined during this time.

Investing

It is worth noting that Cisco has consistently reported quarterly earnings that either beat or matched estimates, and it maintained that trend in the most recent quarter which was the strongest first quarter in terms of revenue and profitability. Adjusted profit climbed 29% annually to $1.11 per share in Q1. Unadjusted net income was $36.0 billion or $0.89 per share, which is up around 37% year-over-year.

All five operating segments registered growth in the October quarter, driving up total revenues by 8% to $14.7 billion as customers continued to invest in generative AI, cloud, security, and full-stack observability. Geographically, the Americas accounted for most of the revenue growth, more than offsetting weakness in the other regions.

Splunk Deal

Recently, the company revealed plans to acquire Splunk Inc., a public cybersecurity and observability company. The transaction is expected to close by the end of the third quarter of calendar year 2024, subject to regulatory sanction and approval by Splunk shareholders.

Extending the post-earnings downturn, Cisco’s shares traded down 11% on Thursday afternoon. The stock is 18% below the highs of August 2023.