Cisco shares rose Thursday morning on less-than-terrible earnings news, providing a counterpoint to the general malaise in the economy and the overall stock market, which has suffered steep losses this week on deteriorating sentiment about the economy.
Cisco shares rose +2.18 (5.19%) to $44.15 in morning trading, in comparison to the S&P 500, which was down almost 2%. Investors breathed a sigh of relief as Cisco managed to put in a respectable, profitable quarter that beat Wall Street analyst expectations despite terrible news worldwide as global economies grapple with the economic fallout of the COVID-19 pandemic.
The San Jose, Calif.-based company reported third-quarter (fiscal year) net income of $2.8 billion, or 65 cents a share. After adjusting for stock compensation and special effects, Cisco reported earnings of 79 cents a share, a slight increase from 78 cents a share a year ago. Analysts' estimates from FactSet had projected adjusted earnings of 71 cents a share on revenue of $11.9 billion on average.
Company executives pointed to the company's cybersecurity portfolio and WebEx videoconferencing business as ports of strength in the storm. While Cisco's core infrastructure business declined 15%, its security portfolio revenues rose 6%, offsetting some of those losses. Still, revenue overall declined 8% to $12 billion from $12.96 billion in the year-ago period
So why would the stock rally, you say? It appears the company was having a great start to the year before COVID-19 started to disrupt things. The company has also been streamlining operations, with large layoffs in recent months, in an effort to boost profitability. Cisco investors perhaps looked to the fact that the news was not, in fact, terrible, and that the company is still profitable, despite a difficult quarter as the pandemic rocked global technology supply chains.
“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," said Cisco CEO Chuck Robbins in a prepared statement. "We remain focused on providing the technology and solutions our customers need to accelerate their digital organizations."
The trading action in the shares indicates that Cisco is now considered a more conservative stock, after years of raising dividends and maintaining a strong balance sheet with billions of dollars of cash.
Going forward, however, things are anything but clear. Cisco has large exposure to the enterprise and small and medium business segments, which will be hit the hardest in the COVID-19 pandemic. Because the COVID-19 pandemic accelerated late in Cisco's quarter ending April 25, Cisco's fourth fiscal year quarter ending in June may result in better information.
For the fiscal fourth quarter, Cisco executives said they expect revenue decreases to accelerate, providing guidance of a year-over-year sales decline of 8.5% to 11.5%.
Robbins described the current economic landscape as “the greatest financial crisis in our lifetime” that has disrupted technology supply chains. But expressing the ever present optimism that Cisco is known for, Robbins rolled out some business cheerleading: “We believe we will surface from this crisis better than before,” he said.
Cisco investors may be relieved that the company is so far managing through the crisis quite well, but they will need to withstand at least another two quarters before it's clear how the business community responds to back-to-work efforts and whether they will go back to investing in networking infrastructure, which remains the bulk of Cisco's business.
R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.