13 August 2020

Investors Dump Cisco’s Shares Despite Q4 Beat

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What’s happening: Shares of Cisco Systems Inc. declined in extended trading on Wednesday despite the networking firm reporting fourth-quarter results ahead of market expectations.

What happened: The covid-19 crisis has forced the company’s clients to cut back their spending in a global recessionary environment.

Despite witnessing a decline in sales across most of its segments and regions, Cisco managed to beat consensus estimates. Investors were disappointed, however, with management’s forward-looking comments.

How were the results: The maker of network services and security software reported a rise in earnings for the fourth quarter, although revenues declined.

  • Revenue contracted by 9% to $12.15 billion, from $13.4 billion in the same quarter last year. However, the figure came in better than the consensus view of $12.1 billion.
  • Net income stood at $2.6 billion, or 62 cents per share, up from $2.2 billion, 51 cents per share, in the year-ago quarter.
  • Excluding certain items, the company earned 80 cents a share, higher than market expectations of 74 cents per share.

Why it matters: Cisco generates a large portion of its sales from government agencies as well as small- and medium-sized companies. Although some bigger clients maintained their spend on the company’s offerings, smaller customers suffered the most during the crisis and almost halted the spend to maintain sufficient liquidity to cover them through the pandemic.

The Silicon Valley based company saw a decline in almost all its major segments, with revenues from infrastructure platforms tumbling 16% to $6.6 billion and revenues from applications sliding 9%. One ray of hope was the security revenues, which grew by 10%.

Cisco said that sales in the Americas had declined by 12% during the fiscal fourth quarter and that demand in the region had not shown any signs of improvement in the last 90 days.

CEO Charles Robbins announced the target to cut expenses by $1 billion, laying out a restructuring plan that will include job layoffs and voluntary early retirement. Cisco is likely to record $900 million in related onetime charges.

Cisco also announced the retirement of its CFO Kelly Kramer, who will stay on with the company until his successor has been found.

Kramer said that Cisco will continue to purchase smaller firms to boost sales and remains on track with its acquisition of Acacia Communications.

Cisco disappointed investors by issuing weak guidance for the first quarter. The company projects a 9% to 11% decline in revenues, which translates to a range between $11.71 billion and $11.97 billion, versus analyst expectations of $12.25 billion.

Management also projected adjusted earnings in the range of 69 cents to 71 cents per share, versus the consensus estimate of 76 cents per share.

How shares responded: Shares of Cisco plummeted 6.4% to $45.00 in after-hours trading following the release of quarterly results. The stock has gained more than 11% over the past three months, which has taken share prices to the pre-pandemic levels.

What to watch: Investors expect Cisco to face a tough road ahead. Markets are optimistic, however, about the tech conglomerate to return to a growth track in the longer term.

The Markets Today

     

US stocks will be in focus today, ahead of the initial jobless claims report scheduled for release later in the day.

Context: The three major Wall Street indices closed higher on Wednesday, with tech stocks leading the rally, as investors took a breather from worrying about the deadlock in the US government’s fiscal stimulus talks.

Details: Market sentiment was lifted by reports of a slowdown in the number of coronavirus cases in the US, along with rising optimism about a covid-19 vaccine being approved and launched soon.

Strong economic reports also indicated signs of a recovery in the US. The consumer price index rose 0.6% in July, better than the 0.4% increase the economists were expecting. Core prices also improved 0.6% last month.

Among the top gainers, Tesla’s shares skyrocketed more than 13% on Wednesday, after the electric-car maker announced a five-for-one stock split. Brinker International’s stock jumped 14% after the company posted a lower-than-expected quarterly loss and issued a strong forecast for the current quarter.

The Dow Jones index climbed 1.1% to settle at 27,976.84 on Wednesday, while the S&P 500 closed higher by 1.4% at 3,380.35, after briefly surging above its record closing high of 3,386.15.

Tech stocks provided a major boost to the market rally, taking the Nasdaq 100 higher by 2.1% to close at 11,012.24.

The US dollar index, which is a gauge of the greenback versus six major rivals, dropped 0.2% to 93.43 in the previous session.

The yield on the 10-year Treasury note increased 1.2 basis points to 0.669% in the prior session, following an 8.4 basis-point rise on Tuesday.

What to watch: Investors await data on export prices, import prices and initial jobless claims from the US. Analysts expect jobless claims to increase 1.1 million in the latest week, versus a 1.2 million rise in the in the week ending August 1. Import prices, which rose 1.4% in June, are expected to increase 0.6% in July. However, export prices are expected to rise by just 0.4%, versus a 1.4% increase in June.

The markets will continue to monitor the daily coronavirus numbers, with total cases approaching the 5.2 million mark in the US.

Other Markets: European indices were trading lower at 8:30am GMT, with the FTSE 100, French 40 and Dax 30 index down by 1.1%, 0.3% and 0.1%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Turkey’s gross foreign exchange reserves, Mexico’s interest rate decision, China’s foreign direct investment and Argentina’s consumer price index.

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