Experts worry that Cisco’s weak outlook and plan to slash over $1 billion in costs shows that the pandemic is having a tougher impact on the enterprise tech industry than it first seemed (CSCO)

Cisco’s shares tumbled more than 11% on Thursday after the company posted a weaker-than-expected outlook and announced a plan to slash over $1 billion in costs amid a deepening crisis that has hurt key segments of the enterprise tech market.
“The past six months have unquestionably reshaped our world,” Cisco CEO Chuck Robbins told analysts on the company’s quarterly earnings call on Wednesday.
Wall Street analysts agreed Cisco’s report pointed to more uncertainty ahead for Cisco and the enterprise tech market as a whole.
“Tone around enterprise was clearly more reserved than we would have liked,” Morgan Stanley analyst Meta Marshall told clients in a note.
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Cisco got an unexpected lift from the COVID-19 crisis, which triggered a sharp pivot to remote work that led to a spike in demand for the tech giant’s networking and cybersecurity products.

But that’s turning out to be a short-term boost for the tech giant, which is now bracing itself for the longer-term impact of the pandemic.

Cisco shares plunged more than 11% on Thursday after reporting a weaker-than-expected outlook and announcing that it plans to slash over $1 billion in costs.

“The past six months have unquestionably reshaped our world,” Cisco CEO Chuck Robbins told analysts on the company’s quarterly earnings call on Wednesday.

Cisco actually beat estimates for its fiscal fourth quarter, posting a profit of $2.6 billion, or 62 cents a share, compared to a profit of $2.2 billion, or 51 cents a share for the year-ago period. Revenue slipped 9% over the same period to $12.2 billion. Adjusted income was 80 cents a share. Analysts were expecting a profit of 74 cents a share, on revenue of $12.1 billion.

But for the current quarter, Cisco said it expects a profit of 69 cents to 71 cents a share — a forecast coming in below Wall Street’s consensus projection of 76 cents a share.

“We saw some strength in the very high-end of enterprise and then sort of as you go down in the marketplace, the weakness got a little bit worse as it just sort of went straight down,” Robbins said. “As you would expect with small and medium sized businesses and even smaller sized enterprises.”

He said the plan to cut costs, which will be focused mainly on operating expenses, is part of Cisco’s strategy for adapting to what has morphed into a deeper crisis. But Robbins also noted that Cisco will “accelerate” investments in key areas, including cloud security and collaboration, and technologies geared to key industries, including education and health care.

Long-term impact

The report quickly sparked a selloff on Wall Street although analysts offered mixed views on what it means for the tech giant long term.

“Tone around enterprise was clearly more reserved than we would have liked,” Morgan Stanley analyst Meta Marshall told clients in a note.

Cisco’s report appeared to reinforce an increasingly downbeat view of the enterprise tech market six months into the coronavirus crisis. Last month, IBM, another tech behemoth, opted now to give a full-year financial guidence due to economic uncertainty caused by the pandemic. CEO Arvind Krishna told Wall Street analysts that “the economic recovery is looking to be longer and more protracted then we might have hoped for back in March.”

But Marshall called Cisco’s “cost-savings efforts” encouraging as she affirmed her “overweight,” or buy, rating on Cisco, arguing that the tech giant’s “earnings resilience is being underestimated by the market.”

But William Blair analyst Jason Ader, who has a “market perform,” or neutral rating on Cisco, had a more downbeat view of the tech giant which, like other traditional enterprise tech companies, has grappled with the rapid rise of the cloud.

The fast growing trend allows businesses to set up networks on web-based platforms, making it possible to scale down or even abandon private, in-house data centers. This has hurt the business of traditional vendors that sell hardware and software used for private data centers.

Like other tech giants, Cisco is pivoting to more cloud-focused products, even as it struggles to maintain its traditional businesses focused on private data centers.

“Cisco is facing a crossroads moment in its business that was not caused by the pandemic but is being exacerbated by it,” Ader told clients in a note. “The pandemic is spotlighting that despite some progress in recent years in transforming its business toward higher-growth software and cloud revenue, Cisco remains heavily dependent on hardware and on-premises revenue.”

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