Cisco shares dip 6% on tepid earnings outlook, revenue decline

Cisco Systems Inc. reported financial results that were largely in line with Wall Street estimates, but another revenue decline and soft earnings guidance dinged the stock in after-hours trading Wednesday.

The maker of network services, videoconferencing tools and security software reported fourth-quarter net income of $2.64 billion, or 62 cents a share, as revenue declined 9% to $12.15 billion from $13.4 billion in the year-ago period. After adjusting for stock compensation and other effects, Cisco reported earnings of 80 cents a share, down slightly from 83 cents a share a year ago.

Analysts surveyed by FactSet had projected adjusted earnings of 65 cents a share on revenue of $12.09 billion on average, though those expectations have come down significantly since COVID-19 began to spread across the globe. Analysts expected adjusted earnings of 75 cents a share on sales of $13.14 billion at the end of 2019.

First-quarter adjusted earnings guidance of 69 cents to 71 cents fell short of the 75 cents modeled by FactSet analysts.

The fourth-quarter results, announced after the market’s close Wednesday, initially sent Cisco

shares down more than 6% in after-hours trading. Cisco stock is flat in 2020, while the S&P 500 index

has climbed 4.6%. Since March 12, however, Cisco shares have jumped 45%.

“By the end of fiscal 2020, we achieved our goal of more than half of our revenue coming from software and services, and this strategy continues to resonate with customers as they digitize their organizations,” Cisco Chief Executive Chuck Robbins said in a statement announcing the results. “As we focus on the future, we are rebalancing our R&D investments to focus on new areas so we can continue to offer customers the best, most relevant technology in simpler, more easily consumable ways.”

The San Jose, Calif.-based company is both benefiting and suffering in the age of coronavirus: Hardware sales are being squeezed during the health and economic crisis, while demand for Cisco tools and services that aid remote work has never been stronger.

Cisco finds itself in a gauzy situation during the pandemic: It is dominant across network equipment markets but faces pressure from unpredictable Service Provider and enterprise spending; COVID-19 and the work-from-home movement has put pressure on high-margin campus product groups; and the recent entry of Arista Networks Inc.

and Juniper Networks Inc.

into campus switching and WLAN pose threats.

“We are cognizant that Cisco’s top line is challenged in the near to medium term from macro headwinds, but diversification, opex [operating expense] discipline and cash flow flexibility afford it the ability to show greater resilience on the earnings line,” Morgan Stanley analyst Meta Marshall, said in July 9 note that upgraded Cisco shares to overweight and maintained a price target of $54.