Cisco Systems Reports Q3 Earnings: Revenues Rise by 12% YoY
Focus on Order Declines: Investors Watch Cisco Systems' Q3 Performance Closely
As the Information Technology giant, Cisco Systems Inc (NASDAQ: CSCO), gears up to release its Q1 financial reports, the world of investment sets its eyes on a crucial metric - orders. Wall Street analysts predict an adjusted profit of 97 cents on revenues of $14.39 billion for the company. Still, the crux of interest lies in the orders, believed to be the best indicator of underlying demand and growth trajectory.
Cisco's shares have seen a 4% dip since the January quarter results were reported, which Evercore ISI analyst Amit Drianani attributes to investors' heightened focus on orders rather than revenue growth. In the January quarter, Cisco reported a 22% slump in orders year-over-year, following several consecutive quarters of more than 30% growth. This decline has stoked concerns about real demand levels and a potential decrease in the 2024 order backlog.
Trading News views the 30% drop in orders posted by Juniper Networks last quarter as a potential red flag for Cisco. Nevertheless, Drianani suggests that a decline of less than 30% should allow Cisco's stock to rally, with figures likely paralleling the previous quarter's low 20% range.
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The focus on orders is shared by many analysts, including JPMorgan's Samik Chatterjee. He argues that even a potential boost to Cisco's July 2023 fiscal year forecasts will likely be overlooked if orders fall by 22% or more for another quarter, which he believes will be seen as definitive proof of a much weaker demand background.
David Vogt of UBS echoes similar sentiments, stating that even though "order growth" is lighter by about 0.25% in the April quarter, there is an increased risk that the anticipated moderation in order declines from 22% last quarter will not materialize. To put this in perspective, Cisco product orders surged by 33% in the January 2022 quarter, moderating to 8% growth in the April 2022 quarter.
Despite these concerns, Cisco's forecasts for tonight suggest an increase of 11% to 13% in revenues, implying a figure of $14.4 billion. This aligns exactly with the analysts' forecast. The company's GAAP earnings are projected to be between 74 and 79 cents, with analysts expecting 78 cents. For the non-GAAP gross margin for the quarter, Cisco predicts a range between 63.5% and 64.5%.
Looking forward to the July quarter, the market anticipates revenue of $14.95 billion, a 14.1% increase, with adjusted earnings of $1.04 per share, and GAAP earnings of 84 cents per share. For the July 2023 fiscal year, Cisco expects revenue growth between 9% and 10.5%, approximately $56.6 billion in the mid-range. The company projects an annual adjusted profit of between $3.73 and $3.78 per share and between $2.85 and $2.96 per share on a GAAP basis.
In the realm of stock value, Trading News believes that Cisco's stock is undervalued at the current market price of about $47 per share. This valuation is deemed reasonable considering that sales are projected to grow by near double-digits in the near term. Moreover, we think that the company will outperform its big tech peers in the event of a potential economic downturn given the secular spending trends on digitization and networking. We value CSCO stock at about $59 per share, which is almost 25% ahead of the current market price.
Cisco's performance in the Q3 FY'23 is eagerly anticipated on May 17. Trading News expects revenue for the quarter to come in at about $14.45 billion,slightly ahead of estimates, and an uptick of about 12% year-on-year.
We also anticipate earnings to stand at approximately $0.98 per share, marginally outperforming consensus estimates.
The quarter's revenue growth will likely be propelled by the alleviation of supply chain constraints, enabling the company to clear its backlog for its networking products. Gross margins could also see a slight improvement, driven by easing inflation and enhanced supply. In Q2 2023, Cisco indicated robust new orders, noting double-digit sequential order growth from the commercial and enterprise space. The demand from the public sector also seems to be on the rise.
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Trading News believes that Cisco is well-positioned to remain a key beneficiary of rising spending on cloud computing. The company has been steadily transitioning towards a recurring revenue model with its software subscriptions and services contracts, and it will be of keen interest to track the company's performance in this area. Over the last quarter, total annualized recurring revenue stood at $23.3 billion, marking a 6% year-over-year increase.
The analysis by Trading News suggests that the software and communications company is expected to report earnings per share (EPS) of 97 cents on revenues of $14.39 billion for the quarter ending March 31. From a technical perspective, Cisco appears bullish as it has settled into an uptrend on the daily chart. However, investors should be mindful of the potential risks of holding a position in a stock over earnings, as stocks can rise following an earnings miss and fall after reporting a beat.
In the previous quarter, Cisco reported earnings of 88 cents per share, surpassing the Street estimate for EPS of 85 cents. The company also posted a top-line beat, reporting revenues of $13.592 billion compared to the $13.43-billion consensus estimate. This resulted in the stock rallying about 5.24% the following day, although it gave back all those gains over the next five days.
On May 18, 2023, Cisco missed on the top line in the fiscal third quarter and issued a worse-than-expected revenue forecast for the current quarter. The company's revenue remained approximately flat year over year in the quarter, which ended on April 30. In contrast, the previous quarter's revenue grew by 6%. For the fiscal fourth quarter, Cisco predicted 76 cents to 84 cents in adjusted earnings per share and a year-over-year decline in revenue of 1% to 5.5%.
Cisco Systems Inc. (CSCO) opened at 47.06 on May 17, 2023, slightly higher than its previous close of 46.91. The company has a market capitalization of $191.3B and is expected to experience earnings growth of 8.41% over the next five years. On the same day, CSCO outperformed IBM and Wipro Ltd but trailed slightly behind CDW Corp.
Trading News would like to draw investors' attention to Cisco's Q3 earnings report and the company's guidance for the current quarter to make informed investment decisions. On May 17, 2023, Cisco Systems Inc (CSCO) stock was trading at a price of $47.61. According to the 17 analysts who offered 12-month price forecasts for the company, the median target for CSCO stock was $56.00, with a high estimate of $69.00 and a low estimate of $51.00.
Given this analysis, Trading News advises investors to keep a close eye on Cisco's reporting date on May 18th. Any surprises in the earnings report could potentially cause a surge or a decline in the stock price, depending on whether the company exceeds or falls short of expectations.
