What happened
Shares of Cisco Systems (CSCO +0.53%) tumbled this week, according to S&P Global Market Intelligence. The maker of networking, software, and cloud-computing solutions posted weak revenue numbers for its fiscal third quarter and is guiding for a decrease in revenue in the fourth quarter. As of this writing on Thursday, shares are down 16.7% this week.
So what
After the market closed on Wednesday, Cisco reported its earnings for the three months ending in April. Revenue was $12.8 billion in the period, flat year over year, while adjusted earnings per share (EPS) came in at $0.87. The EPS number beat analyst expectations, but revenue was significantly off of the $13.34 billion consensus expectations.
On top of this miss, Cisco released weak guidance for a 1% to 5.5% revenue decline next quarter, compared to analyst expectations for 6% growth. These weak top-line numbers are likely the key reasons investors are selling off the stock this week.
Image source: Getty Images.
But it's not all bad news for Cisco. For the full fiscal year 2022, it is expecting revenue to grow 2% to 3% year over year, which hopefully means the forecast fourth-quarter decline is only temporary due to the pull-forward in demand that happened because of the pandemic.
The company is also highly profitable, generating $9.5 billion in operating cash flow through the first nine months of fiscal year 2022. This might not be hypergrowth, but there's a reason Cisco's stock trades at a market cap of $172 billion: all the cash flow it generates.
Now what
Right now, Cisco Systems trades at a price-to-operating-cash-flow (P/OCF) of 12, with a trailing-12-month operating cash flow of $14.3 billion. This ratio is below the market average, which makes sense given the slow-growth nature of the business.
It also pays out a healthy dividend to investors, currently yielding 3.64%, and has steadily repurchased shares over the past decade. These capital return strategies will help boost Cisco's total return over the long haul even if the business doesn't grow much.
As I mentioned above, Cisco is a very mature business, and investors should not expect revenue to grow at a super-fast rate. Guidance for a decline in revenue in a quarter is never great, but given what stage the business is at right now, this shouldn't be a huge concern for investors in the company.
