Cisco Systems beats but shares drop on soft enterprise orders; analysts worried about true underlying demand

Cisco Systems (NASDAQ:) shares traded 3.5% lower in pre-market Thursday despite the company reporting better-than-expected FQ3 results.

Cisco posted an of $1.00, better than the consensus estimate of $0.97. Revenue grew 14% year-over-year to $14.6 billion, beating the consensus estimate of $14.4B.

On a more negative note, product orders declined 23% YoY in the quarter. Total software revenue grew 18% and software subscription revenue was up 17% year-over-year.

Total annualized recurring revenue (ARR) increased 6% year-over-year to $23.8B, with product ARR up 10%. Remaining performance obligations (RPO) increased 6% year-over-year to $32.1B, with product RPO up 9%.

“In Q3, we delivered record revenue and double-digit growth in both software and subscription revenue. As key technologies like cloud, AI and security continue to scale, Cisco’s long-established leadership in networking, and the breadth of our portfolio position us well for the future,” said CEO Chuck Robbins.

For Q4/23, the company expects EPS in the range of $1.05-$1.07, compared to the consensus of $1.04. Revenue growth is expected in the range of 14%-16% year-over-year, which implies sales of $15.07B at the midpoint of the guidance. Analysts were looking for $14.95B.

For the full year, Cisco raised its EPS guidance to the range of $3.80–$3.82, from the prior $3.72-3.78 range. Revenue is now expected to grow 10%–10.5%, up from the prior 9-10.5% range.

Some analysts were disappointed that Cisco didn’t raise the revenue growth ceiling outlook. Goldman Sachs analysts said orders miss creates uncertainty into underlying demand.

“We are encouraged by reiterated expectations for revenue growth – albeit modest – for F2024 (implied ~$58+ bn) with EPS growth exceeding revenue growth (implied at least $3.94). That said, F2024 revenue guidance is undoubtedly benefiting from backlog reduction (expectations for ~$4-5 bn reduction in backlog in F2024 from F2023 year-end), which contributes to the investor debate around true underlying demand,” they wrote in a client note.

Rosenblatt analysts commented:

“CSCO is not the networking stock we want to own, but we think the space is solid, and we expect Cisco’s order performance to improve from -23% y/y in 3Q23, which looks like the low point.” 

Additional reporting by Senad Karaahmetovic