Home News The Persistent Impact of Covid-19 on Cisco Systems

The Persistent Impact of Covid-19 on Cisco Systems

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Cisco Systems, a prominent technology company, continues to face challenges from the ongoing Covid-19 pandemic. Recently, their outlook for the future stunned Wall Street with gloomy predictions directly tied to the fallout from the pandemic.

In terms of financial performance, Cisco’s results for the October quarter were satisfactory. They reported revenue of $14.7 billion, an 8% increase and at the higher end of the company’s guidance range. Their adjusted profit also exceeded expectations, standing at $1.11 per share, eight cents above Wall Street’s forecast. However, these positive aspects were overshadowed by several significant concerns.

Notably, product orders experienced a sharp decline of 20% during the quarter. This included a substantial 32% decrease in orders from telecom and cloud customers, as well as a notable 26% slide from enterprise customers. It’s important to note that orders ultimately translate into revenue, so witnessing such a decline is far from encouraging.

Following this disheartening news, Cisco’s stock plummeted nearly 10% on Thursday. Year-to-date, the stock has remained relatively flat, significantly lagging behind the Nasdaq’s impressive 35% rise.

Looking ahead to their January quarter, Cisco’s guidance foresees a revenue of $12.7 billion, down 6.6% compared to the previous year. This projection falls short of consensus by a staggering $1.5 billion. Additionally, Cisco has also revised its revenue outlook for the July 2024 fiscal year, reducing it by approximately $3 billion—an estimated decline of 5%. The company attributes these revisions to the lasting impact of the pandemic.

During the Covid-19 period, Cisco faced severe challenges due to component shortages and logistical complications, hindering their ability to deliver products. As a result, their revenue experienced a significant decline of over 9% in both the July and October quarters of 2020. However, while grappling with these obstacles, a backlog of orders accumulated for Cisco.

Over the past few quarters, the company managed to resolve these component issues, allowing them to produce more routers, switches, and similar products. Consequently, revenue surged by 14% in the April quarter and 16% in the July quarter. Unfortunately, this positive momentum did not reflect increased demand; rather, it stemmed from a surge in product shipments. Furthermore, at present, Cisco’s customers possess an excess supply of their products, as there are one or two quarters’ worth of shipped items awaiting installation at customer sites.

In conclusion, Cisco Systems continues to navigate the lingering challenges posed by the Covid-19 pandemic. Despite their positive financial results for the October quarter, concerning factors such as declining orders and a revised revenue outlook cast a shadow over their future prospects. While the company overcame initial hurdles in product delivery, they now face a surplus of inventory with limited demand.

Cisco Faces Questions as Huge Miss in Quarterly Earnings Revealed

The latest quarterly earnings report from Cisco has left many wondering how the company failed to see the massive miss coming. Chief Financial Officer Scott Herren attributes the revenue drop to the sheer volume of product that was shipped out during the period.

However, this unexpected turn of events has raised several important questions. Firstly, what does the buildup of customer inventories indicate about ongoing demand? Will customers resume ordering once this digestion phase is complete? The answers to these questions remain unclear.

Following the revised outlook, New Street Research analyst Pierre Ferragu downgraded Cisco shares from Buy to Neutral. While Cisco management believes that customers are simply taking time to deploy recently delivered orders, Ferragu and others are less optimistic. They believe that the disconnect between orders and revenues over the past year, coupled with uncertain IT spending trends, warrants caution.

Despite Cisco’s assurance that orders will pick up in the upcoming quarters, the sharp decline in the stock price reflects investor skepticism. UBS analyst David Vogt, with a Neutral rating on Cisco shares, shares this concern. He points to growing macroeconomic pressures that could continue to weigh on the company’s performance.

On a positive note, some argue that Cisco’s current low valuation presents an opportunity for investors to “bottom-fish.” With the stock trading at just 12 times expected fiscal 2024 earnings and 3.5 times forward revenues, and offering a 3% yield, there are appealing aspects. Additionally, Cisco has committed to repurchasing $1.25 billion of stock every quarter. However, until the company provides more evidence of order rebound, the stock is likely to face challenges regardless of its attractive valuation.

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