Thursday, May 14, 2020

Investors on Cloud Nine After Cisco’s Upbeat Results

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What’s happening: Shares of Cisco Systems gained in extended trading on Wednesday after the tech giant reported better-than-expected results for the fiscal third quarter.

What happened: Cisco’s CEO Chuck Robbins described the pandemic as “the greatest financial crisis” in our lifetime. Despites this, the San Jose, California-based company surprised markets with its upbeat earnings release and issued guidance for the fourth quarter at a time when most companies are withdrawing or declining to issue any outlook.

Results from Cisco, which is a major manufacturer of networking equipment, are seen as an indicator of the global demand for IT (information technology). A decline in the tech giant’s revenue highlights softness in the IT sector despite a rise in demand for network infrastructure and video calling, with companies being forced to work with remote teams amid the coronavirus crisis.

How were the results: Although Cisco reported a revenue decline for the fiscal third quarter, both sales and earnings surpassed consensus views

  • Net income came in at $2.8 billion, or 65 cents a share for the quarter. Excluding one-time items, Cisco earned 79 cents per share, up from 78 cents a share in the same quarter last year. This exceeded expectations of 71 cents a share.
  • Revenue declined by 8% to $12 billion, from $12.96 billion in the year-ago quarter, but surpassed the consensus estimate of $11.9 billion.

Why it matters: With most employees working from home during the pandemic, Cisco witnessed a rise in spending on data servers and centres. The company, being the biggest provider of gears for computer networks, is benefitting immensely from this trend. Cisco’s WebEx video conferencing platform also saw a steep increase in users. On the other hand, companies worldwide have reduced their IT spending amid widespread lockdowns.

Revenue from Cisco’s hardware business plummeted 15% to $6.43 billion, while its software unit reported a decline of 5% in sales to $1.36 billion. The security business proved to be the bright spot for the company, with revenue growing 6% during the quarter.

Management projected fourth-quarter earnings at 72-74 cents per share with a decline in revenue of between 8.5% and 11.5%.

“The pandemic has driven organizations across the globe to digitize their operations and support remote workforces at a faster speed and greater scale than ever before. We remain focused on providing the technology and solutions our customers need to accelerate their digital organizations,” CEO Chuck Robbins said.

How the shares responded: Shares of Cisco closed the regular session lower by 2.9% on Wednesday but climbed 2.4% in extended trading following the release of strong quarterly results. The company’s stock has gained around 2% over the past month, but has shed 11% in the past three months.

What to watch: Cisco’s strong quarterly results and guidance for the fourth quarter illustrate that the company is well positioned in the coronavirus-induced crisis. Investors expect companies to increase their IT spend in time, to support their workforce working from home, as the crisis brings in a new normal. This will bode well for Cisco Systems.

The Markets Today

     

US stocks will be in focus today, as investors await the jobless claims report scheduled for release later in the day.

Context: US stocks closed lower on Wednesday, as investors digested downbeat remarks from Federal Reserve Chairman Jerome Powell.

Details: Various state officials are trying to kickstart businesses across the country following the coronavirus outbreak. Even then, hopes of a quick recovery were crushed by Powell’s remarks of near-term uncertainty for the economy.

“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks,” Powell said.

Economic data continued to disappoint investors, with the US reporting a higher-than-expected decline of 1.3% in its producer-price index for April. Expectations were pinned on a 0.5% decline.

The Dow shed 516.67 points to settle at 23,247.97 on Wednesday, led by decline in shares of Dow Inc and American Express. The S&P 500 index slipped 1.8% to end at 2,820, while the Nasdaq 100 declined 1.6% to 8,863.17.

Uber Technologies and Grubhub are in acquisition talks, according to the Wall Street Journal. Shares of Cisco Systems rose around 3% in extended trading, after the company reported better-than-expected quarterly results.

In commodity news, WTI (West Texas Intermediate) crude for June fell 2% to end at $25.26 a barrel on the NYMEX (New York Mercantile Exchange), while June gold rose 0.6% to settle at $1,716.40 an ounce.

What to watch: Investors continue to keep an eye of the daily COVID-19 cases, with the total number of infections exceeding 4,347,920 globally. The number of positive COVID-19 cases in the US has surpassed 1,390,400 with around 84,110 deaths.

US stocks are expected to open on a downbeat note today, with stock futures trading lower in the European session. Markets await a basket of economic reports from the country, including initial jobless claims, export prices and import prices. Analysts expect the number of Americans filing for unemployment benefits to drop to 2.5 million in the latest week, versus the prior reading of 3.169 million. Import prices, which fell 2.3% in March, are expected to decline another 3.1% in April. Export prices are likely to fall as well, by 2.1% in April.

Other Markets: European indices were trading lower at 9:00am GMT, with the FTSE 100, German 30 and Italy’s FTSE MIB down by 1.4%, 1.3% and 1.2%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

Canada’s new motor vehicle sales and manufacturing sales, Mexico’s interest rate decision, China’s foreign direct investment, Argentina’s inflation rate as well as US natural gas stocks change.