Earlier this week, Juniper Networks (JNPR) lowered guidance, blaming weak enterprise spending and lower capex at Tier 1 telecoms. Many investors will say not to read too much into this. For example, Juniper and Cisco Systems (CSCO) have different revenue mixes. But I believe Cisco will miss for different reasons when it reports its fiscal third-quarter results, set for May 11. (Cisco is a holding in Action Alerts PLUS.)
After Cisco reported its fiscal second-quarter results back in February, management gave cautious third-quarter guidance that was below consensus. The stock bounced higher only because the company raised the divided and launched a new stock buyback plan. Despite an extra week, I expect Cisco to come up short for the third quarter.
Consensus expectations are for earnings per share of $0.55 on revenue of $11.97 billion. But that's not much of an achievement considering Cisco had revenue of $12.137 billion in the year-ago period. Analysts are modeling total fiscal year 2016 (ending July) revenue of $49 billion, which is flat with last year.
Last quarter, switching declined 4% to $3.4 billion, which is almost 30% of revenue. Total product revenue fell 1%. The best news in the second quarter was that routing rose 5%, but that's only 15% of revenue. Data center revenue was down 3%, and wireless showed no growth. Enterprise revenue fell 2% and the public sector showed no growth, so I don't know why everybody is so excited.
CSCO stock only rose after management announced a 24% hike in the dividend and a $15 billion share buyback. If they didn't do that, the stock would be dead in the water.
In fiscal year 2015, third-quarter revenue grew 5.8% sequentially, but this year sequential growth is likely to be just 4%, which means Cisco will end the year with virtually no revenue growth. Next year, the top line is expected to grow less than 3% on flat gross margins.
So how is Cisco a "buy" when it has little growth and important revenue-generating segments of the company have stalled out? And, as mentioned, the quarter would be even weaker if analyst estimates didn't include an extra week.
I don't expect see CSCO over $30 anytime soon.