Cisco shares were taking a beating Thursday morning on investor worries about the outlook for the network equipment provider, with orders for its wares falling around the globe.
While Cisco CFO Kelly Kramer said in an interview that guidance for the current quarter ending in April was “spot down the fairway,” in line with expectations, weakening orders nonetheless led some analysts to think the guidance is too optimistic.
A quick review: For the fiscal second quarter ended in January, Cisco (ticker: CSCO) reported revenue of $12 billion, down 4%, in the middle of its guidance range of down 3% to 5%. Adjusted earnings per share were 77 cents, at the high end of the range of 75 cents to 77 cents. Product revenue fell 6%, while service revenue rose 5%.
For the current quarter, Cisco sees revenue falling 1.5% to 3.5% from a year earlier, a range of $12.5 billion to $12.8 billion, bracketing current consensus at $12.6 billion. Cisco sees profit for the quarter on an adjusted basis of 79 cents to 81 cents a share, in line with estimates.
But as Kramer said, there was widespread weakness in orders. Overall, orders were down 6%—worse than the 4% drop in orders in the first quarter. Asia-Pacific was down 4%, dragged lower by a 30%-plus decline in China. In the region comprising Europe, the Middle East and Africa orders were down 1%, with particular weakness in the U.K. In the Americas, orders were down 8%, hurt by weakness in both the service provider and data center segments. Kramer said it could take a few more quarters for orders to turn positive.
J.P. Morgan analyst Samik Chatterjee maintains an Overweight rating on Cisco shares, but concedes that the quarter offered fodder to feed the bears. “While for the bulls on the stock it would represent a semblance of stabilization of headwinds that will be accompanied by stabilization in earnings, at the same time for the bears the earnings announcement is likely to offer enough to latch onto, including continued moderation in product order trends—which if sustained could make the stabilization temporary,” he wrote in a research note. “We see limited near-term catalysts, either in the form of macro or impending product cycles.”
Needham’s Alex Henderson wrote that the weakness in orders “marred the print,” noting that enterprise orders were down 7%, commercial orders were off 4% and service provider orders were down 11%. Henderson said the guidance could have been worse.
Kramer said the latest guidance contains no haircut for the impact on the supply chain because of the coronavirus, and Henderson thinks the virus could have been used as an excuse for a far more conservative approach to the outlook. “We remain at a Hold, but, hey, it could have been worse.”
MKM Partners analyst Michael Genovese asserted in a research note that the guidance for the current quarter looks aggressive, given the order trends. He noted that orders have been decelerating for four straight quarters, because of softness in enterprise spending, various country-specific issues and, in particular, trade troubles in China. Genovese said his work finds that Cisco tends to underperform the market when product orders are decelerating.
He said he “doesn’t like” that the revenue guidance is materially stronger than orders and that Cisco “seems to be counting on Services persistently outgrowing Products,” a trend which he does not think is sustainable in the long run. “We would potentially be more positive on Cisco if we could call a sustainable improvement in the Product order rate, “but the tenor of the macro environment makes that difficult at the current time.”
Cisco shares were down nearly 6% late morning. The decline has knocked more than 20 points off the Dow Jones Industrial Average.
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