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Earnings Results: ‘We did not have a plan for a country to shut down’ — Cisco stock plunges 13% as China lockdown affects supply and outlook

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Cisco Systems Inc. shares plunged in the extended session Wednesday after the tech bellwether’s revenue and forecast fell well short of Wall Street expectations amid COVID lockdowns in China and the war in Ukraine.

Cisco
CSCO,
-4.43%

shares dropped more than 15% after hours, following a 4.4% decline in the regular session to close at $48.36.

The company reported third-quarter net income of $3.04 billion, or 73 cents a share, compared with $2.86 billion, or 68 cents a share , in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were 87 cents a share, compared with 83 cents a share in the year-ago period. Revenue was virtually flat at $12.83 billion compared with $12.8 billion in the year-ago quarter.

Analysts surveyed by FactSet had forecast 86 cents a share in adjusted earnings on revenue of $13.37 billion, based on Cisco’s forecast of 85 cents to 87 cents a share on revenue of $13.19 billion to $13.44 billion.

Cisco forecast fiscal fourth-quarter earnings of 76 cents to 84 cents a share on a 5.5% to 1% year-over-year decline in revenue, or a range between $12.1 billion and $12.67 billion. Analysts surveyed by FactSet estimate 92 cents a share on revenue of $13.87 billion.

That guidance forced Cisco to chop its annual forecast with just a couple months to go in its fiscal year. After consistently predicting revenue would increase 4.5% or better in this fiscal year, Cisco executives reduced their view to sales growth of 2% to 3% for the year, while also reducing their annual forecast for adjusted profit.

“We continued to see solid demand for our technologies and our business transformation is progressing well,” said Chuck Robbins, Cisco’s chief executive and chairman, in a statement. “While Covid lockdowns in China and the war in Ukraine impacted our revenue in the quarter, the fundamental drivers across our business are strong and we remain confident in the long term.”

For the third quarter, “secure, agile networks” sales rose 4% to $5.87 billion and hybrid work, or collaboration, sales declined 7% to $1.13 billion, while “Internet-for-the-Future” sales rose 6% to $1.32 billion and end-to-end security sales rose 7% to $938 million from the year-ago period. Analysts had forecast “secure, agile networks” sales of $6.1 billion, “hybrid work” sales of $1.13 billion, IftF sales of $1.44 billion, and end-to-end security sales of $930.8 million.

Total product sales rose 3% to $9.45 billion, compared with the Street’s estimate of $9.81 billion, and services revenue declined 8% to $3.39 billion, while analysts expected $3.54 billion.

Last week, focus fell on Cisco’s security business following reports that Shelly Blackburn, Cisco’s vice president of security sales and a 22-year veteran, was leaving the company. Cisco has not confirmed such as move. As of Wednesday, Blackburn’s Twitter and LinkedIn page still lists her at Cisco.

Last quarter, Robbins admitted the company needs to improve its security business, and overall the company told MarketWatch that while supply chain issues had not gotten any better they had also not gotten any worse. Supply-chain issues have dogged Cisco for more than a year as they have most manufacturers who rely upon semiconductors amid a global chip shortage.

“I will say that we have room to get better on security and the teams are working hard on that,” Robbins told analysts three months ago, when asked why Cisco’s security business wasn’t growing as fast as Palo Alto Networks Inc.
PANW,
-7.33%
,
Fortinet Inc.
FTNT,
-4.32%
,
or Check Point Software Technologies Ltd.
CHKP,
-1.99%
.

“I think it’s a combination of we’ve got some work to do which the teams are working on, and then the transition and a little bit of supply chain,” Robbins told analysts back in February. “But we would expect over the next two to three years for that business to continue to get better and the teams are committed to make that happen.”

In the past 12 months, Cisco shares fell 9% as of Wednesday’s close, compared with a 7% decline on the Dow Jones Industrial Average 
DJIA,
-3.57%
,
  of which Cisco is a component, a 10% drop on the S&P 500 index
SPX,
-4.04%
,
and a 16% fall on the tech-heavy Nasdaq Composite Index 
COMP,
-4.73%
.

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