Cisco Systems, Inc., the tech giant known for its networking products, recently reported its earnings for the first quarter of fiscal year 2025, shedding light on its financial performance and future plans, especially focused on artificial intelligence investments.
During the earnings call, Cisco announced earnings per share (EPS) of 91 cents, surpassing analysts' expectations of 87 cents. Revenue came in at $13.84 billion, reflecting a slight decrease of 6% year-on-year but still managing to beat estimates by about 1%. The company’s solid gross margins were credited for this impressive EPS achievement.
Despite the positive figures, shares of Cisco dipped by 1.3% to $58.41 following the announcement. The market's reaction reflects the broader trend of cautious investor sentiment amid fluctuated demand and competition pressures.
One of the key takeaways from Cisco's earnings report is its strong momentum around artificial intelligence. The company has seen over $300 million worth of AI-related orders, indicating significant interest and growth potential within this sector. This enthusiastic engagement with AI places Cisco “well on track” to meet its planned goal of generating $1 billion from AI orders by the end of fiscal 2025, according to analysts such as Morgan Stanley's Meta Marshall.
Cisco's fiscal first-quarter results were influenced largely by its product categories, especially its Splunk performance, which has started yielding higher recurring revenues. The firm raised its revenue guidance for FY25 by $200 million, driven by the anticipated demand environment and benefits from incremental recurring revenues from services like Splunk.
Analysts noted Cisco’s business model is particularly resilient due to its diverse revenue streams. The increase noted is attributed significantly to consistent demand for its subscription services and annual recurring revenues, which continue to offer stability against the backdrop of lower hardware sales. Despite the overall decline, the remaining performance obligations still hint at potential future revenue growth.
The earnings calls have also underscored Cisco’s commitment to data centers as enterprises move toward modernization due to AI demands. Analysts pointed to “meaningful traction” across three key areas of AI investment, primarily networking solutions focused on improving connectivity, which is fundamental for AI applications.
Goldman Sachs and Piper Sandler analysts maintained their neutral ratings on Cisco stocks but did adjust their price targets upwards, reflecting confidence in the company's growth strategy to weather the current economic climate. Goldman increased its target from $51 to $56, whereas Piper Sandler raised it from $52 to $57. Morgan Stanley, on the other hand, maintained its overweight rating and raised the price target to $62.
Cisco’s management expressed optimism during the earnings call, focusing on improving margins and decreasing inventory as factors contributing to anticipated growth. They highlighted their competitive edge through innovation and investments as they adapt to the rapid pace of AI adoption across various industries.
Even with the positive outlook driven by the AI growth strategy, risks remain prevalent. Competition is intense, and Cisco's historical underperformance relative to the S&P 500 adds to the caution surrounding its future stock performance. Nevertheless, CSCO remains regarded as undervalued compared to its peers and is seen by analysts as having significant potential upside as market conditions stabilize post-2025.
Overall, Cisco Systems entered FY2025 with promising numbers, driven by its investments, particularly in AI technologies. Although the immediate market reaction was tepid, many experts believe the company's focus on subscription and recurring revenue models, combined with its strategic expansion within AI, positions it favorably for the future. Industry watchers will be closely observing how these developments play out as Cisco seeks to regain its footing and exceed previous benchmarks amid increasing economic uncertainties.
