Cisco Earnings: Management Again Lowers Outlook

Key Morningstar Metrics for Cisco Systems

• Fair Value Estimate: $50.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: TK
• Morningstar Uncertainty Rating: TK

What We Thought of Cisco Systems’ Earnings

We’ve trimmed our fair value estimate for Cisco Systems CSCO to $50 per share from $53, as weak guidance for the rest of fiscal 2024 leads us to reduce our short-term forecasts. The firm continues to see lower demand as its large customers work through inventory stockpiles following two years of overordering. While we’d previously seen management’s expectations for a short-lived correction as rosy, new fiscal 2024 guidance is still well below our prior forecast. We remain fans of Cisco’s long-term position, with its heady profits, cash flow, and good dividend, but the short term looks weak. With a market selloff after the release commensurate with our valuation cut, we continue to see shares as close to fair value.

January-quarter sales dropped 6% year over year and 13% sequentially to $12.8 billion. Networking sales shepherded weak results, declining 12% year over year and 20% sequentially. Cisco is seeing weakness mostly in its large enterprise, cloud, and service provider customers within networking. Security and collaboration sales continue to underperform as well, with both declining sequentially.

Guidance for the April quarter missed our model, and the company reduced its fiscal 2024 guidance for the second quarter in a row. A sales midpoint of $12.2 billion in the April quarter is 8% lower than we expected, and the fiscal 2024 sales midpoint of $52 billion is 4% lower than our prior forecast. In our view, this reflects longer and deeper inventory digestion at Cisco’s largest customers, but it doesn’t give us long-term concern. We believe Cisco will return to growth when customer inventory gets digested and orders better reflect underlying demand. We see supernormally high growth in fiscal 2023 and declines in fiscal 2024 exhibiting short-term cyclicality but not long-term demand destruction.