Lukewarm Earnings For Cisco, Shares Stumble

Shares of telecommunications giant Cisco Systems were trading down as much as 7% in the aftermath of the company’s Q2 earnings last week. They released the numbers after Wednesday’s session and the stock immediately gapped down about 5% on Thursday morning. It traded lower before catching a bid into the close and finishing about where it opened. On Friday, shares traded pretty flat as investors continued to digest the news so all eyes will be watching the ticker tape on Tuesday to see what happens.

While the EPS and revenue figures both beat analyst expectations, they won’t be inspiring much confidence on Wall Street. Non-GAAP EPS was $0.77 and only $0.01 above the consensus while revenue actually contracted 3.5% year on year.  To put these figures into perspective, EPS was up 16% year on year for this quarter last year but is now barely registering 5% growth. Revenue growth has fallen for four consecutive quarters, from a solid 7% this quarter last year, to the -3.5% it is now.

Turn in Form

This turn in form wasn’t in the cards this time last year. The stock had been trading at 18-year highs last July and while it was still a long way off from the heights it reached during the dotcom bubble, things were looking good. In the previous 6 months, it had rallied over 40% alone. However, with their Q4 earnings last August, management handed out forward guidance that was much lighter than expected. The analyst downgrades and target cuts came flowing in in the weeks following and the company announced that same month that 488 staff were being laid off.  By early December, the stock was down over 25%.

While the slide has been steadied somewhat in the 10 weeks since last week’s release isn’t about to bring a strong bid to the stock just yet. On top of the lackluster numbers for this past quarter, in their forward guidance for their next earnings report, management is looking at upwards of another 3.5% contraction in revenue.

In their comments with the release, management focused on the positives. CFO Kelly Cramer said "We executed well this quarter by delivering strong margins and EPS growth while driving more software and subscriptions. Our increased dividend shows confidence in the strength of our ongoing cash flows and demonstrates our commitment to shareholder return." Chuck Robbins, CEO, said "I am incredibly proud of the innovation our teams continue to drive. I am confident in our long-term growth opportunities as we help our customers build out the networks for the future."

Is It Just a Slow Patch?

In a sign of the efforts to show confidence to investors in their ability to get back to winning ways, the company recently approved a 2.9% dividend increase. Many investors would have been hoping for a double-digit increase like they’ve had in the past, but at least it’s in the right direction. The company’s revenue model is still in the process of becoming a pure subscription business and as this continues, investors should expect good things for the topline numbers.

For those looking to get involved in the coming days, marking $46 as the first line of defense and then $43.50. This is the low of the post-summer sell-off and unless management continues to weaken forward guidance, buyers should be found here. On the other side, look at $50 as the number to beat and any move in shares above this level would confirm the recovery is well on track. It’s bounced back from there a number of times in recent weeks and forms the first major line of resistance.