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Cisco Drops 6% On Disappointing 1Q Profit Guidance As Spending Slows
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Cisco Drops 6% On Disappointing 1Q Profit Guidance As Spending Slows

Shares in Cisco Systems sank more than 6% in extended market trading on Wednesday after the network equipment maker warned about a spending slowdown and forecast fiscal first-quarter earnings below Wall Street estimates.    

The stock dropped to $45 in after-market trading as Cisco (CSCO) forecast current-quarter revenue to decline between 9% and 11% from the same period last year, implying a range of between $11.71 billion and $11.97 billion. The analyst consensus is for $12.25 billion. The company expects adjusted earnings of 69 cents to 71 cents per share, which is below analysts’ estimates of 76 cents.

“The pandemic has had the most impact on our enterprise and commercial orders, driven by an overall slowdown in spending. We are seeing customers continue to delay their purchasing decisions in certain areas while increasing spend in others until they have greater visibility and clarity on the timing and shape of the global economic recovery,” said Cisco CEO Charles Robbins. “Despite this challenging economic environment, the pandemic has also triggered a massive and rapid shift to remote operations and automation to maximize personal safety.”

Robbins disclosed that Cisco plans to cut costs by $1 billion on an annualized basis over the next few quarters.

For the fiscal fourth quarter, sales declined 9.5% to $12.15 billion year-on-year, topping estimates of $12.08 billion, as the work-at-home shift drove demand for Cisco’s web security and virtual networking products. In the quarter ended July 25, the company earned an adjusted 80 cents per share in the quarter, exceeding estimates of 74 cents.

“We executed well in Q4, delivering strong margins despite the very challenging environment,” said Cisco CFO Kelly Kramer. “Software subscriptions now make up 78% of our software revenue and remaining performance obligations continued to grow strongly in the quarter, reflecting the strength of our portfolio of software and services.”

In addition, Cisco announced that Kramer will retire from the company once a replacement is found.

Following the earnings results, five-star analyst Jonathan Ruykhaver at Robert W. Baird lowered the stock’s price target to $46 from $48 and maintained a Hold rating saying that he expects overall Cisco growth to remain under pressure as macro headwinds persist. (See Cisco’s stock analysis on TipRanks).

“Our $46 price target represents an EV/CY21E FCF of ~12.2x, a discount to peers trading at a median of ~15x,” Ruykhaver wrote in a note to investors. “We see this discount as justified given our expectations for continued macro and secular pressures though believe the multiple could expand if Cisco shows better than expected growth.”

Overall, Wall Street analysts are cautiously optimistic on the stock’s outlook. The Moderate Buy consensus is divided between 12 Buys and 8 Holds. The $50.38 average price target implies 4.7% upside potential in the coming 12 months.

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