In a notable rebound, Cisco Systems Inc. (CSCO) reported strong earnings and guidance, leading to a 5% surge in extended trading.
However, the excitement was short-lived as shares closed down 2.7% on Thursday. This mixed reaction indicates that while there are signs of recovery in customer spending on computer networks, investors remain cautious about the company’s long-term prospects.
Core Business Stabilizes Amid Strategic Shifts
In the April quarter, Cisco's revenue fell 13% year-over-year to $12.7 billion, slightly exceeding analyst expectations of $12.5 billion. Despite the revenue drop, profits were higher than anticipated, with adjusted earnings at 88 cents per share, surpassing the forecast of 86 cents. This positive outcome was bolstered by the addition of $400 million in revenue from Cisco’s $28 billion acquisition of network monitoring firm Splunk.
Despite the year-over-year revenue decline, Cisco's efforts to manage inventory gluts and navigate tough comparisons from a post-Covid sales surge are beginning to pay off. The company’s traditional customer base of large enterprises and internet backbone providers is expanding to include data centers that host cloud services and emerging artificial intelligence (AI) technologies.
Optimism and Strategic Moves
Cisco’s strategic pivot towards networking services and software, exemplified by the acquisition of Splunk, is aimed at reducing dependency on hardware sales. The shift towards AI infrastructure is particularly promising, with the company projecting $1 billion in sales to support AI initiatives by fiscal 2026. Robbins emphasized this during an analyst call, noting the potential for significant orders from hyperscalers like Microsoft and Google.
For the upcoming quarter, Cisco forecasts revenue between $13.4 billion and $13.6 billion and adjusted earnings per share of 84 to 86 cents. This guidance aligns with analyst estimates, reflecting a cautious yet optimistic outlook. Cisco’s non-GAAP operating margin is expected to be between 31.5% and 32.5%, indicating efficient cost management.
The addition of Splunk has significantly enhanced Cisco’s recurring revenue stream, which now constitutes more than half of its total sales. This transition to long-term contracts for software and services is crucial for sustained growth. The company's deferred revenue and remaining performance obligations have reached nearly $39 billion, underscoring the financial stability and future revenue prospects.
Investor Caution Amid Positive Signals
Despite the initial surge, Cisco’s shares closed down 2.7% on Thursday, reflecting investor caution. CEO Chuck Robbins remarked that customers continue to prioritize their tighter IT budgets, leading to conservative optimism among investors. Even though Cisco delivered solid top and bottom-line results and upbeat revenue guidance, the demand environment still contains uncertainties.
In the April quarter, Cisco delivered adjusted EPS of 88 cents, surpassing its estimate, and revenues of $12.7 billion, exceeding forecasts. Product orders increased by 2% year-over-year, with significant contributions from data center and campus switching, as well as Security and Collaboration categories.
The acquisition of Splunk added 2 points to Cisco's product order growth, highlighting the strategic importance of this purchase. Cisco identified 5,000 existing customers that could become significant Splunk customers, potentially boosting its total customer count by over 30%.
AI has helped the industry establish stabilization, with Cisco noticing upward momentum among top hyperscalers to leverage its designs for AI. This gives Cisco confidence in its goal of $1 billion in AI product orders by FY25.
Looking ahead, Cisco anticipates Q4 adjusted EPS of 84 to 86 cents and revenues of $13.4 billion to $13.6 billion, marking a long-awaited sequential increase. While IT budgets remain scrutinized, Cisco expects improvements in subsequent quarters, particularly in the U.S. public sector.
Conclusion
In conclusion, Cisco’s recent performance reflects notable improvements and strategic advancements. However, investors remain cautious due to the unchanged macroeconomic backdrop. Despite this, Cisco continues to innovate and expand its market reach, making it a key player in the evolving technology landscape.
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