By Senad Karaahmetovic

Cisco Systems’ shares fell over 11% during premarket trading on Thursday, after Cisco informed investors of further China-related lockdowns. These supply chain issues could also impact the quarter’s sales growth.

Cisco Q3 adjustedEPS was 87c. This is an increase from the 83c reported in the previous year and is just below the consensus estimate of 86c per shares. The revenue came in at $12.84 Billion, which was flat YoY but below the consensus estimate of $13.34 billion.

The adjusted gross margin was 65.3%, which is compared with 66% for the same quarter last year and an analyst consensus of 64.3%. Cisco’s product revenue was $9.45 Billion, which is 3.4% higher YoY but still below analyst estimates of $9.79 Billion.

Cisco is expecting adjusted earnings per share (EPS) in the range of 75c to 80c for quarter four, while analysts had expected at least 92c. According to Cisco, Q4 revenue growth will be between 1% and 5.5%, which is lower than analyst expectations of +5.7%. Analysts were anticipating 64.8%. However, the adjusted gross margin is expected to be between 64%-65%.

Cisco projects FY revenue growth between 2 and 3 percent, which is lower than its 5.5%- 6.5% forecasts, as well as the analyst estimates at 6.05%. For the entire year, adjusted earnings per share are expected to be between $3.29 and $3.37. This is down from the $3.41-3.46 range, but below the $3.44 analyst consensus.

Cisco claimed that its departure from Russia resulted in a loss of revenue of $200 million. Historically, Russia represented roughly 1% of Cisco’s sales, the company added.

“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.”

Jim Suva from Citi, Citi’s analyst on Cisco, reduced the target price to $40.00/share from $45.00. Suva also maintained a Sell rating. Citi is the only active sell-side firm with a Cisco Sell rating.

“The investor pushback on our rating has been meaningful. Although we don’t anticipate Cisco to decrease its dividend, the company should increase its stock-buyback activity. Cisco still has $17.6billion in its stock-buyback program. Also, we expect the consensus numbers to be materially revised lower. This will highlight how y/y comparisons are more difficult in future quarters. We are yet to see if consensus will be as negative as we expect. At some point we also expect Cisco to remove or reduce its long-term guidance for F21-25 sales CAGR of +5% to +7% as we believe the supply chain simply will not support such growth,” Suva justified the Sell rating.

BofA analyst Tal Liani reduced the price target from $62.00 to $52.00 because of weak guidance and slow order growth. The analyst is still rated Buy as follows:

“1) We believe management will provide 4-6% FY23 revenue growth guidance next quarter, supported by $32bn in client commitments and recent price increases. 2) We expect higher margins in price rises and cost control. Management will likely aggressively purchase back stock using the $17bn plan authorized. 4) We believe the valuation is attractive, trading after-hours at about 10.7x EV/FCF, taking the stock back to the lows of COVID eruption in 2020 and back to 2017 levels,” Liani told clients.