Will the Cisco Share Price Slide on Q3 Earnings?

Cisco has been hit by a slowdown in sales amid lower corporate spending on technology. Even though Q3 results are expected to show a sharp decline in revenue on Wednesday, the Splunk deal, completed in March, should drive long-term growth.

Cisco [CSCO] unveiled a range of what it describes as “industry-shaping innovations across the Cisco Security Cloud to both power and protect the AI revolution” last week.

Built on its Hypershield architecture and Splunk, which it acquired for $28bn in March, the new features will help companies protect their applications, services and data.

Jeetu Patel, Executive Vice President and General Manager for Security and Collaboration at Cisco, said in a press release that, thanks to Hypershield and Splunk, “the power of Cisco’s security platform is supercharged and unmatched”.

According to Stockcircle, based on the 13Fs so far filed for Q1 2024, four ‘super investors’ sold $9.6m worth of Cisco shares in the first three months of the year. They included Ken Fisher, Founder, Executive Chairman and Co-chief Investment Officer (CIO) of Fisher Investments, who pared down his stake by 6.5%, selling approximately 44,500 shares.

The only buyer who has reported so far is Richard Pzena, Founder and CIO of Pzena Investment Management, who boosted his holding by 78%, snapping up approximately 455,000 shares.

Corporate Spending Slowdown Impacts Q2 Sales

Cisco’s share price has fallen 3.6% since the company reported Q2 results on 14 February. Revenue for the three months to 27 January declined 6% year-over-year. Software revenue was flat, but software subscription revenue was up 5%.

Total annualised recurring revenue (ARR) was up 6%, and product ARR was up 9%. Non-GAAP earnings per share (EPS) decreased 1% year-over-year to $0.87.

The results were overshadowed by the announcement of a restructuring plan that will eliminate 5% of Cisco’s workforce. A slowdown in corporate spending on technology is impacting sales growth, CEO Chuck Robbins told analysts on the earnings call. “Customers are pushing things out and putting a little more scrutiny on them,” he said.

The company had originally anticipated an uptick in spending in the second half of 2024 but now expects inventory levels to remain elevated through the end of the year, Robbins added.

All Eyes on Splunk Deal Details

The company expects revenue for Q3 to come in at $12.1bn–12.3bn, which would mark a sharp decline of 16.4%, at the midpoint, from $14.6bn reported in the year-ago period. Non-GAAP EPS are forecast to be $0.84–0.86. The guidance excludes the impact of the Splunk deal.

“Most of the deterioration will be evident in the networking segment,” wrote Dave Novosel, Senior Analyst of Telecommunications, Media and Technology at research firm Gimme Credit, in comments shared with OPTO.

“Gross margins have been improving over the past several quarters, and we expect more of the same in Q3. But higher spending on selling, general and administrative Expenses could keep operating margins from expanding much.”

In February, Cisco sold $13.5bn worth of bonds in the US investment-grade debt market to partially fund the Splunk deal. S&P Global Ratings gave Cisco an AA- grade for the bonds, and Moody’s affirmed its A1 rating.

Novosel will be keeping an eye out for “details on the ultimate funding of the Splunk acquisition, as well as estimated synergies from the deal” when Cisco reports its Q3 results on Wednesday.

Cisco’s Share Price Stalls

Concerns about slowing sales growth have weighed on the Cisco share price, which is down 3.3% year-to-date as of 13 May and down 0.9% in the past month. In the past 12 months, it has gained 6.9%.

Other than holding Cisco shares outright, another way to gain exposure to the stock is through thematic ETFs.

The Pacer Data and Digital Revolution ETF [TRFK] has Cisco as its fourth-biggest holding, with a weighting of 6.3% as of 13 May. The fund is up 57.7% in the past year and up 11.7% year-to-date.

The Defiance Next Gen Connectivity ETF [FIVG] has Cisco as its sixth-biggest holding, with a weighting of 4%. The fund is up 27.4% in the past year and up 5.7% year-to-date.

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