The question of whether Cisco will experience any topline growth this year hangs heavily over the networking giant as it prepares to release its October quarter results. Cisco (CSCO) finds itself navigating a complex operating environment, amid soft demand for equipment providers in the telecommunications sector. Ericsson and CommScope, among others, have reported disappointing results due to this weakened demand. Despite this, the enterprise sector appears to be displaying stronger demand, as indicated by the impressive performance of Arista Networks. Arista Networks, leveraging AI-related cloud computing work, has been enjoying positive results. Nevertheless, concerns remain regarding the outlook for IT spending in 2024, with signs of weakness appearing in certain areas, exemplified by the recent results from IT consulting giant Accenture.
Cisco’s recent quarterly results continue to reflect the lasting effects of significant component shortages during the pandemic. These shortages resulted in a surge in orders and backlog reaching historically high levels. As the component supply chain issues have gradually eased, Cisco has been actively reducing its backlog, leading to increased shipments and revenue. However, the hardware surge has led to a decline in order volumes as customers absorb the excess inventory.
In the fiscal fourth quarter that ended on July 31, Cisco achieved 16% revenue growth, marking the highest full-year growth rate since 2010 at 10.6%. However, orders in this quarter were down approximately 14% compared to the same period in the previous year. Cisco announced that it closed the year with a backlog double the usual amount but anticipated a significant reduction in the October quarter.
Looking ahead, Cisco provided a projection of October quarter revenue between $14.5 billion and $14.7 billion, representing a 7% increase at the midpoint of this range. Non-GAAP profits are expected to range from $1.02 to $1.04 per share. According to FactSet’s consensus, analysts forecast revenue of $14.6 billion, profits of $1.03 per share, and billings of $14 billion, up by 4% from the previous year.
Cisco’s Revenue Forecast for July 2024
Cisco has recently released its revenue forecast for the fiscal year of July 2024. The company expects to generate between $57 billion and $58.2 billion in revenue, representing a modest 1% increase from the previous year. On an adjusted basis, profits are projected to fall within the range of $4.01 and $4.08 per share. Analysts’ consensus estimates for the full year suggest revenue of $57.8 billion and profits of $4.05 per share. At the lower end of Cisco’s forecast range, the company’s revenue would remain flat. This forecast reflects a potential slowdown in growth during the second half of Cisco’s fiscal year.
Market Perspective
Wall Street analysts, overall, seem unconcerned about the near-term prospects of Cisco’s October and January quarters. However, there is a growing sentiment among analysts that the company may face challenges in maintaining its growth momentum during the latter part of the fiscal year.
A research note from Evercore ISI analyst Amit Daryanani highlights the debate surrounding the risk to second-half estimates. Daryanani mentions weaker enterprise demand but also considers the potential uplift from AI-related orders. Investors are likely to closely monitor order growth rates, and any return to positive year-over-year growth may be seen as a catalyst for the stock. Daryanani maintains an Outperform rating and sets a target price of $63.
On the other hand, UBS analyst David Vogt’s survey data on IT buyers indicates that while enterprise demand showed some improvement in the latest quarter, the forward outlook suggests a downward trend due to likely softer orders. Vogt also points out macro pressures, especially in Europe, which could further impact Cisco’s performance in the second half of the year. With this analysis, Vogt retains his Neutral rating and sets a target price of $55.
Stock Performance
Despite some uncertainties and a potentially challenging second half, Cisco’s shares have performed well during the year, with a 10% increase. However, the stock has seen a slight decline since the last earnings report.
In conclusion, Cisco’s revenue forecast for July 2024 indicates relatively conservative growth expectations for the upcoming fiscal year. Analysts highlight potential risks and challenges to the company’s growth momentum in the second half, while also noting factors that could act as catalysts for positive performance. Investors will closely monitor Cisco’s order growth rates and the company’s ability to return to positive year-over-year growth.
