MarketWatch First Take: Cisco needs to hit the high end of its forecast to justify optimism

MarketWatch First Take: Cisco needs to hit the high end of its forecast to justify optimism

13 Nov    Finance News

Cisco Systems headquarters in San Jose, Calif.

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Cisco Systems Inc., after a fourth consecutive quarter of falling revenue, needs to hit the high end of its forecast for its fiscal second quarter, and investors appear to believe that it will do just that.

On Thursday, the networking and software giant reported fiscal first-quarter results that exceeded Wall Street’s expectations, even as revenue fell 9% in the quarter to $11.9 billion, amid a 15% drop in orders from its corporate enterprise customers.

“On the enterprise side I’m not too concerned about it, honestly,” said Cisco CSCO, -1.67% Chief Executive Chuck Robbins on a conference call. “We did have some pretty significant compares from the year earlier which contributed to that, but the thing I would call out is we saw a pretty significant improvement in our commercial orders.”

The 15% drop in the company’s enterprise business followed a 7% enterprise decline in the July-ending fiscal fourth quarter. But Robbins pointed out that Cisco’s commercial-product business, which slid 23% in the July-ending quarter as pandemic shutdowns squeezed small businesses, fell just 8% in the most recent quarter.

“I’ll tell you, in the U.S. it was even a greater improvement from that, so that gives us a fair amount of optimism,” he said. “I think the enterprise thing is going to be fine.”

Cisco forecast that its revenue in the next quarter would range from flat to down 2% year over year, or about $11.8 billion to $12 billion in revenue. That guidance was better than Wall Street’s expectations, which were for Cisco’s revenue to come in at $11.6 billion in the next quarter. In after-hours trading, Cisco’s shares jumped nearly 8%, but its stock remains down about 18% this year, compared with the S&P 500 SPX, -0.99%, which is up around 10% for the year.

“We think Cisco’s underlying commentary was more positive versus their guide, as they are seeing uptick on orders/demand momentum across multiple verticals, especially the public vertical,” said Amit Daryanani, an ISI Evercore analyst, in a note.

Indeed, Cisco said it was seeing a strong backlog of orders. “We see a robust pipeline right now,” said outgoing Chief Financial Officer Kelly Kramer. “We see large transactions showing up again in the funnel, which is positive.”

On the plus side, Cisco did see positive growth in its WebEx videoconferencing business, thanks to the masses of people who are still working from home during the pandemic. Cisco said it had nearly 600 million participants, almost double the number in March, and growth in WebEx offset declines in its unified communications and TelePresence business. It also said its CAT 9000 software-based networking business grew, but it did not give too many more specifics.

After too many quarters of declining revenue, Cisco needs to see a turnaround to growth. If the company lives up to its guidance, flat revenue in the next quarter would be a huge relief for investors.

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