Why Cisco Stock Plunged 11% This Week

Shares of Cisco Systems (CSCO -9.84%) are down 11% this week as of 3:30 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence, after the networking solutions giant reduced its full-year outlook despite solid fiscal first-quarter 2024 results (for the period ended Oct. 28).

On the former, Cisco’s quarterly revenue climbed 8% year over year, to $14.67 billion, translating to a 29% increase in adjusted non-GAAP (generally accepted accounting principles) earnings to $4.5 billion, or $1.11 per share. Analysts, on average, were expecting earnings of $1.03 per share on slightly lower revenue of $14.63 billion.

Cisco’s record quarter just wasn’t enough

Within Cisco’s top line, total software revenue and software subscription revenue each grew 13% year over year, while annualized recurring revenue climbed 5% to $24.5 billion. Remaining performance obligations (RPO) — a key metric to help gauge future revenue growth — grew 12% year over year to $34.8 billion exiting the quarter.

Cisco chairman and CEO Chuck Robbins called it a “solid start” to the new fiscal year, noting that Cisco set fresh Q1 company records for revenue and profitability.

We are confident in the foundational strength of our business and future growth opportunities fueled by AI, Security, Cloud, and Observability,” Robbins added.

What’s next for Cisco investors?

Recall that Cisco also struck a $28 billion deal in September to acquire cybersecurity and observability company Splunk. That acquisition is still subject to the approval of regulators and Splunk shareholders. But assuming all goes as planned, it should close by the end of the third quarter of calendar year 2024.

Despite its solid headline numbers, however, Cisco also said it “saw a slowdown of new product orders” during the quarter — likely as “customers are currently focused on installing and implementing products in their environments following exceptionally strong product delivery over the past three quarters.”

More specifically, Cisco estimates there are currently one to two quarters of shipped product orders still waiting to be implemented by its customers.

As such, Cisco issued guidance calling for fiscal second-quarter 2024 revenue of $12.6 billion to $12.8 billion, with adjusted earnings per share of $0.82 to $0.84. Both ranges fell below Wall Street’s consensus estimates for fiscal Q2 earnings of $0.89 per share on revenue of $12.87 billion.

Cisco also lowered its full fiscal-year outlook to call for revenue of $53.8 billion to $55 billion (down from $57 billion to $58.2 billion previously), and adjusted earnings per share of $3.87 to $3.93 (down from $4.01 to $4.08 before).

In the end, this was indeed a strong start to the fiscal year for Cisco. But our market is a forward-looking machine, and it’s no surprise to see Cisco stock pulling back hard in light of its freshly reduced guidance. Until we see more signs of that implementation backlog clearing, I think Cisco’s share price will remain under pressure.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems and Splunk. The Motley Fool has a disclosure policy.

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