(Bloomberg) — Cisco Systems Inc., the largest maker of computer networking equipment, tumbled late in the session after giving a disappointing forecast, fueling concerns that companies are reining in technology spending.
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The company said in a statement on Wednesday that sales through January would be $12.6 billion to $12.8 billion, well below analysts’ expectations of $14.2 billion. Excluding certain items, profit per share would have been 82 cents to 84 cents, compared with a forecast of 99 cents.
After the news was announced, the stock plunged 16% in after-hours trading before recovering slightly, down 11%. Shares rose 12% in 2023, closing at $53.28 on Wednesday.
Cisco’s report shows that a slowdown in hardware networking orders is having an impact on growth. Chief Executive Chuck Robbins is trying to reduce the company’s reliance on single-use device sales by pushing deeper into software and services such as security. But the shift isn’t complete enough to cushion the impact of Cisco’s declining spending budget.
Robbins said the macro economy has not weakened. The slowdown in orders (down 21% in the first quarter) was largely due to customers temporarily halting new orders to install equipment they had already received.
“It’s probably easier for me to say it’s macro factors — we didn’t see a material deterioration this quarter,” Robbins said on a conference call with analysts. “Over the last six months, we’ve seen The backlog has definitely been offloaded, and that’s billions of dollars more equipment than we would normally ship.”
The company expects the weak order environment to persist and estimates “there will still be one to two quarters of shipped product orders waiting to be filled by customers.”
Still, the company said it hopes sales will pick up again in the second half of the year.
“We expect product order growth to accelerate in the second half of the year following customer implementation of a large number of recently shipped products,” Chief Financial Officer Scott Herren said in a statement.
Cisco is trying to further diversify its business by acquiring data-processing software maker Splunk Inc. for $28 billion, a deal announced in September. The deal will allow Cisco to sell more services to enterprise customers, including services that monitor network health and cybersecurity risks.
The company expects to close the transaction by the end of the third quarter of 2024.
Read more: Cisco to acquire Splunk for $28 billion, making bet on AI-driven data
Cisco’s adjusted gross margin (the percentage of sales remaining after production costs are deducted) for the current quarter is expected to be 65% to 66%, which is in line with expectations.
The San Jose, California-based company said sales in fiscal 2024 will be between $53.8 billion and $55 billion, down from a previous range of $58 billion. The average analyst estimate for sales was about $58 billion. Bloomberg survey.
In Cisco’s first fiscal quarter ended October 28, revenue grew 8% to $14.7 billion. Excluding certain items, profit per share was $1.11. This compares with estimates of revenue of $14.6 billion and earnings of $1.03 per share.
Cisco Finance Chief Herron said this was the third consecutive strong quarter, which had an impact on forecasts.
“Let’s not completely forget that we had a great quarter. That helps explain where we are now. The bottleneck has moved downstream,” he said in an interview.
Cisco also emphasized that it is benefiting from spending on artificial intelligence systems. The company says it is winning orders from large companies to build infrastructure to handle more AI computing. It now has about $1 billion worth of such orders, double what it had three months ago.
Herren said the company is making progress in generating more software and services revenue. Currently, about 44% of its sales come from recurring sources, and that number is growing, he said. Acquiring Splunk will “help a lot” in raising capital, which is higher, he said.
(Updated with additional executive comments starting in fifth paragraph.)
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