Cisco Crashes 20% On Catastrophic Guidance; Blames China, Ukraine

And the hits just keep on coming.

After ugly earnings from Walmart yesterday, terrible earnings and guidance from Target, both of which confirmed the US consumer is now tapped out, moments ago the company which has served as the backbone of the internet for the past 30 years and is the biggest maker of computer-networking equipment, the $200-billion CISCO, reported earnings which wiped out about 20%, or $40 billion, from its market cap in seconds.

First, here is what the company reported for the just concluded 3rd fiscal quarter, where things were ugly, if not terrible:

• Revenue $12.84 billion, +0.2% y/y, a huge miss to the estimate $13.34 billion
  • Product revenue $9.45 billion, +3.4% y/y, missing estimate $9.79 billion
  • Secure, Agile Networks revenue $5.87 billion, missing estimate $6.08 billion
  • End-to-End Security revenue $938 million, beating estimate $937.1 million
  • Internet for the Future revenue $1.32 billion, missing estimate $1.41 billion
  • Optimized Application Experiences revenue $183 million, missing estimate $194.5 million
  • Other products rev. $2 million, missing estimate $3.58 million
  • Service revenue $3.39 billion, -7.6% y/y, missing estimate $3.54 billion
• Adjusted EPS 87c vs. 83c y/y, beating estimate 86c
• Adjusted gross margin 65.3% vs. 66% y/y, beating estimate 64.3%

Cisco’s Guidance, however, was about as terrible as it gets, first Q4:

• Sees rev. -1% to -5.5%, shockingly worse than the estimate +5.7%
• Sees adjusted EPS 76c to 84c, missing the estimate 92c
• Sees adjusted gross margin 64% to 65%, in line with estimate 64.8%

… and then the full year:

• Sees revenue +2% to +3%, saw +5.5% to +6.5%, and roughly half the consensus estimate +6.05%
• Sees adjusted EPS $3.29 to $3.37, saw $3.41 to $3.46, and far below the estimate $3.44

Some additional commentary:

• Says Pulling Out of Russia Cost $200 Million in Revenue
• Says Historically Russia Accounts for About 1% of Sales
• 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
• “The continued progress in our business model transformation reflects the success of our strategy and underpins our long-term confidence.”
• “We delivered healthy earnings despite unanticipated disruptions through strong pricing and disciplined spend management,” said Scott Herren, CFO of Cisco.
• “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.”

To be sure, makers of tech equipment had already been struggling with chip shortages, and supply snags triggered by China’s Covid-19 lockdowns and the Ukraine conflict have only added to their woes, and Cisco – which said it struggled to fill all the orders it’s been given – was no different.

“We continued to see solid demand for our technologies and our business transformation is progressing well,” said Chuck Robbins, chair and CEO of Cisco. “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.”

While CEO Robbins tried to put lipstick on a pig, not even he had any idea how ugly this quarter would be.

Three months ago, the company said that orders grew at more than 30% for a third consecutive quarter, and investors have been focused on whether the company’s customers will keep signing up for new gear at that rate or whether concerns about inflation and economic growth will make them more cautious.

Alas, the result was far worse than anyone had expected.

It gets worse: under Robbins, Cisco has been trying to boost growth with updated hardware, as well as new services and software; the hope – to make the longtime giant of networking gear less dependent on one-time equipment sales. But the latest quarter showed that it won’t be so easy – earnings will be 76 cents to 84 cents a share in the period, Cisco said. That compares with an average estimate of 92 cents.

CSCO stock tumbled as much as 22% after hours, wiping out $40 billion in market cap in seconds. Cisco shares has fallen 24% this year through the close Wednesday, effectively doubling their loss on what will be a very ugly Wednesday for the market.

The crash sent CSCO stock to the lowest level since November 2020, and will likely drag the Nasdaq even lower when trading reopens tomorrow.