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Cisco Systems (CSCO -2%) is heading lower after reporting generally in-line Q2 (Jan) results last night. More importantly, in our view, Cisco guided below analyst expectations for both Q3 (Apr) and FY24. In addition, Cisco announced a restructuring to focus on key priority areas, which included a 5% workforce reduction. Oddly, Cisco also raised its dividend slightly even as it is seemingly looking to reduce costs. Maybe that was meant as a signal to investors that its financials are fine.

• So a little context would help. Recall that Cisco guided quite a bit below analyst expectations for Q2 when it reported Q1 results on Nov 15. Cisco said back then that, after three quarters of exceptionally strong product delivery, its customers were now focused on installing and implementing this equipment. Basically, the bottleneck that Cisco previously saw in the supply chain has shifted downstream to implementation by customers and partners.
• Cisco said in November that it believed this phase was temporary and expected product order growth rates to increase in 2H (AprQ, JulQ). However, on the call last night, management said it had a "reset" of its view for 2HFY24. Specifically, Cisco is seeing a greater degree of caution and scrutiny of deals, given the high level of macro uncertainty. This is leading Cisco to be more cautious on 2H and explains the weak guidance.
• Also, Cisco says customers have been taking longer than expected to deploy the elevated levels of products shipped to them in recent quarters. Based on conversations with customers, Cisco still believes customers are 1-2 quarters away from full implementation of their inventory which is longer than Cisco had expected. Cisco now expects the current implementation of shipped products to be broadly complete by the end of FY24 (Jul).
• Another issue is that Cisco continues to see weak demand with its telco and cable service provider customers. This industry has seen significant pressure, and they are adjusting deployment phasing which is weighing on Cisco's outlook. A rare bright spot is wireless. Cisco says many wireless customers have finished absorbing what Cisco has shipped to them and are preparing for larger deployments in the coming months.

Overall, we think investors are not focusing much on Q2. The weak guidance for Q3 and FY24 are mostly responsible for the weakness today. Cisco's "reset" of its thinking on how long it will take customers to implement recent shipments to the end of FY24 was a disappointment as well. The restructuring and job cuts were not a surprise as Reuters had reported last week that was likely to happen. All in all, the stock is holding up fairly well, which tells us the guidance reset was not entirely unexpected. Recall that peer Arista Networks (ANET) reported lackluster results on Tuesday.