Cisco sends a worrisome signal for tech demand, and the stock is falling

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Cisco Systems Inc. saw its first double-digit quarterly revenue growth in years, but a signal it sent about tech demand in the months ahead is concerning investors.

On Wednesday, Cisco
CSCO,
+1.51%

reported better-than-expected profits and revenue in the fiscal third quarter. The networking giant reported revenue of $14.6 billion, up 14% from the year-ago period, as overall GAAP gross margins slightly improved sequentially to 63.4%, and executives pushed their annual profit forecast higher.

While all those numbers looked good, shares still dropped 4% in after-hours trading because of a number that wasn’t shared until deep into the chief financial officer’s prepared remarks in a conference call: Cisco’s orders fell by 23% year-over-year in the quarter after falling 22% in the quarter before, putting growth next year in doubt. While predicting sales growth of at least 10% this year with only three months until the fiscal close, executives would only predict “modest” sales growth for next year.

The executive who made those disclosures, Chief Financial Officer Scott Herren, told MarketWatch in an interview later Wednesday that orders fell as customers absorbed prior shipments before placing new orders and cited a reduction in fulfillment time, as lead times have shrunk.

“What we are seeing from our customers is, they are being prudent,” Herren said, adding that his counterparts — other CFOs at other companies — are all being cautious. But he said that Cisco is seeing order cancellation rates at far lower rates than during the pandemic.

Herren also pointed out that Cisco expects earnings to increase, as the company focuses on managing costs.

“We will be continue to focus on spend,” Herren said. “We will be prudent with our spend management in 2023.” He added that during the pandemic, when many companies were hiring heavily, Cisco did not do that, so as a result it has not had to reduce staff as much as some of its larger tech brethren.

In its recently completed quarter, Cisco saw strong growth in its secure agile networks business, which grew 29%, and switching revenue had strong double-digit revenue growth, in part due to its Catalyst 9000 and other offerings. The move to software-based networks has helped the company’s margins, as has its expense controls. Last November, the company announced a restructuring and a big real-estate consolidation. a plan that shuttered about 140 offices around the world.

Investors, though, were hoping for a bit more. JP Morgan analysts wrote in a note to clients before Cisco’s earnings that if orders declined again in the fiscal third quarter, after falling 22% the previous quarter, it would be definitive proof of a weaker demand backdrop.

If Cisco sees demand issues, the fear is that it could portend sector-wide issues to come.



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