Cisco Pops On Earnings, But Is It Sustainable?

Cisco shares gained after an upbeat earnings report that included an increase in guidance and results that beat expectations. Wall St. lapped up the news and investors had their optimism boosted about Cisco's new AI infrastructure products as well as growth in the software and security business.

Cisco shares achieved a new 52-week high near $66 per share in early morning trading, before pulling back to $63, up 1.29% and 81 cents on the day. Cisco shares are up 7% year-to-date.

Cisco CEO Chuck Robbins lauded the results on the conference call, saying it showed enthusiasm for investment in technology infrastructure, including AI.

"I think the one thing our customers understand is that their need to continue spending on technology is just there," said Robbins.

Robbins also played up Cisco's new partnership with AMD to couple Pensando data processing units (DPUs) with Cisco's 9300 switches. Robbins and Jeetu Patel, Cisco's EVP and Chief Product Officer, believe this puts Cisco in the middle of the AI infrastructure market.

Splunk Gets Some Spunk

The networking bellwether reported earnings per share of 94 cents compared to consensus forecast of 91 cents. Revenue came in at $14 billion, vs. expectations of $13.87 billion. That represents a 9% year/year growth, following four consecutive quarters of revenue declines.

On the earnings conference call, Cisco management celebrated the new gains, attributing it to enthusiasm about AI infrastructure as well as progress in absorbing the data analytics company Splunk in 2024, which at $28 billion was Cisco's largest acquisition ever. Cisco CFO Scott Herren said in the company statement that Splunk had become accretive to earnings earlier than expected.

The forecast for the fiscal year ending in August was increased, which now includes adjusted earnings of $3.68-$3.74, with $56 billion-$56.5 billion in revenue. This is a bump up from the consensus of $3.66 in EPS and $55.99 billion in revenue.

Cisco's earnings demonstrated how it has been dramatically remade in the past year through M&A as a large conglomerate spanning networking infrastructure, data analytics software, and security. It printed big gains in its security division, which contributed $2.11 billion in revenue and saw 117% y/y growth with the addition of Splunk revenue.

Guidance Boost; ARR on the Increase

As a closely watched key supplier of enterprise networking and a gauge of industry sentiment, Cisco's results buoyed spirits across the tech sector. The reaction also underlined a key focus of the technology market at large: Will enthusiasm about the boom in AI infrastructure spending be sustained, or could it be derailed by a global trade war and government downsizing?

Mike Genovese, an analyst at Rosenblatt Securities, pointed out that the positives in the quarter included double-digit growth in annual recurring revenue and subscriptions, which now account for 56% of revenue. Cisco has been pushing to remake itself as a company more heavily rooted in software subscriptions, rather than hardware.

Genovese said that Cisco also saw a jump in webscale orders and a rebound in telecom, which has been a drag on Cisco's revenue and earnings for years.

What's Next? Public Sector Overhang

The question now is, what's next? Cisco seems to be finally on track for a better year after years of flat-to-shrinking revenue. But it's still got challenges. Namely:

• Networking revenue remained stagnant, falling 3% y/y
• Collaboration revenue was also a drag, only increasing 1% and down 8% from the prior quarter
• The Wall St. community had many questions about the impact of potential trade tariffs and government downsizing.

The largest issues are the question of government orders as well as global trade, with the Trump administration's downsizing plans taking aim at government spending. The U.S. government is about 10% of Cisco's business.

"If spending is restricted under the current government's attempts to cut budgets, the company's revenue growth could be restricted," wrote Genovese in a research note.

In other news, Cisco announced the departure of the President of GTM and former Splunk CEO, Gary Steele, as he leaves Cisco for a new CEO role. Steele was believe to be a potential successor to Robbins, who has been with the company for ten years.