Cisco Systems, Inc. (NASDAQ:CSCO) and its transformation are continuing down their rocky path following the company’s fiscal third-quarter report. On the news, after Wednesday’s bell, CSCO shares were knocked down by about 7%, cutting shares’ year-to-date gains by about half.
For Q3, Cisco’s net income came to $2.52 billion, or 50 cents per share, up from $2.35 billion (29 cents per share) from the year-ago period. That came in ahead of the consensus mark by 2 cents, too.
However, revenues trickled lower, by 0.5% to $11.94 billion. That marked the sixth straight quarterly drop on the top line, and represented a mere match of analysts’ expectations.
The real problem was Q4 guidance.
For the current quarter, Cisco Systems forecasts earnings of 60 cents to 62 cents, compared to the Street estimate of 62 cents. Worse, revenues are expected to decline by 4% to 6%, versus a consensus for a 1% decline.
Here are some of the highlights of the Cisco earnings report:
- Cash flows from operating activities increased by 10% to $3.4 billion.
- The company repurchased 15 million shares of CSCO stock for roughly $500 million. There is $12.9 billion remaining on the authorization.
- Cisco completed the acquisition of AppDynamics, which is a top provider for monitoring cloud applications.
- The company also agreed to purchase several smaller companies like Viptela, Inc. (software-defined wide area networks) and MindMeld, Inc. (a provider of artificial intelligence technologies).
Technically speaking, this is ugly. Cisco’s after-market advances were accelerating Wednesday, bringing shares down to about $31.40. That not only means CSCO stock is crashing through its 20- and 50-day major moving averages, but that level is just a hair above the company’s 200-day moving average.
That line has acted as support for roughly a year, surviving tests in July and December of 2016. Thursday’s trading, as well as the next few days, becomes crucial, then, as a failure of this level would open up a lot more downside, potentially to $29, and below that, $26.
UPDATE: Before the Cisco earnings report, there was some optimism that the cybersecurity business would provide a lift. One of the most high-profile catalysts was the widespread impact of the WannaCry ransomware virus.
Of course, that never was going to hit this quarter’s bottom line, and it was too soon to factor into Q4. More importantly, only about 5% of Cisco’s revenues come from cybersecurity, so other than a little higher bidding at the start of the week, it was a nonstarter.
Cisco remains a network systems business, and the outlook on that front continues to be far from encouraging. Existing systems are still durable, which means there is not as much urgency to upgrade; one of the main reasons for the soft guidance is a slowdown in U.S. government purchases.
Then there’s the competitive environment, which continues to thicken. Cisco has a mess of competitors, including traditional operators such as Juniper Networks, Inc. (NYSE:JNPR), Hewlett Packard Enterprise Co (NYSE:HPE), Arista Networks Inc (NYSE:ANET) and Huawei. Even operators like Alphabet Inc (NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) have been building out their own networking technologies.
Unfortunately, Cisco has the disadvantage that much of its own systems are hardware-based in an industry that’s moving toward software and a cloud approach.
Cisco’s main strategy doesn’t seem to be moving forward, but engaging in more cost cutting. The company has announced 1,000 layoffs … this after the company reported last summer that it would reduce the workforce by 7%, or 5,500 employees.
But none of this solves any of Cisco’s core problems … and that’s why CSCO stock is taking the beating it is tonight.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.