Cisco’s Financial Performance: Steady Despite Revenue Decline

Cisco Systems Inc (NASDAQ: CSCO), well-known for its networking equipment, security solutions, and cloud management services, inched up by 0.8% on Wednesday, November 13, closing at $59. This growth comes while the S&P 500 index remained flat during the same period. For context, peer Alphabet stock (NASDAQ: GOOG) fell by 1.5%, trading around $180. The company reported $13.8 billion in revenue for the fiscal first quarter, which aligns with their predictions but marks a 6% decline compared to last year. Despite this revenue dip, Cisco’s stock has risen 17% year-to-date, buoyed by strong investments in AI infrastructure and a 20% growth in product orders in Q3. Cisco also recorded a notable earnings per share (EPS) for Q1, with a GAAP EPS of $0.68 and a non-GAAP EPS of $0.91, both exceeding prior guidance due to solid gross margins and favorable tax circumstances.

Outlook for Q2 and Beyond
Cisco has expressed a stable outlook for the second quarter, predicting revenue between $13.75 billion and $13.95 billion, along with a non-GAAP EPS between $0.89 and $0.91. These figures suggest a phase of stabilization, driven by strategic adjustments aimed at boosting growth in AI and security tools. The company also raised its full-year revenue forecast to between $55.3 billion and $56.3 billion, an increase from its earlier projection of $55 billion to $56.2 billion. Moreover, Cisco adjusted its EPS forecast upward to between $2.26 and $2.38, compared to the previous estimate of $1.93 to $2.05.

CSCO Stock Performance Comparison
Over the past three years, the performance of CSCO stock has been inconsistent and more volatile than the S&P 500. Detailed returns show an increase of 46% in 2021, a decrease of 22% in 2022, and a modest 9% rise in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, has consistently outperformed the S&P 500 each year.

Potential Challenges Ahead
Some challenges could lie ahead for Cisco. The company’s Q1 results displayed mixed performance across segments, with security revenues reportedly doubling, while networking revenues plunged by 23%. Overall, product revenue fell by 9%, contrasted by a 6% rise in service revenue, indicating a significant industry shift towards service-oriented offerings. A slowdown in product sales has led customers to focus on the installation and utilization of products they acquired in previous quarters. Furthermore, larger enterprises, such as cloud service providers and telecommunications firms, are exercising caution and reducing capital expenditures on networking due to economic uncertainty. Competition from smaller networking firms is also pressuring Cisco’s growth.

Regional Revenue Trends and Margin Improvements
Geographically, Cisco’s revenue in the Americas and EMEA (Europe, Middle East, Africa) has seen declines, while the APJC (Asia Pacific, Japan, and China) region has experienced only modest growth. Positive developments include improvements in gross margins in recent quarters, attributed to reduced freight and component costs and a stronger product mix. Cisco’s total gross margin, product gross margin, and services gross margin on a GAAP basis were reported at 65.9%, 65.1%, and 68.0%, respectively, compared to 65.2%, 64.5%, and 67.3% in the first quarter of fiscal 2024. This trend may continue into Q2, particularly as the company shifts toward a more recurring revenue model through software subscriptions and service contracts.

Acquisition of Splunk
Cisco’s recent acquisition of Splunk further emphasizes its commitment to enhancing its security capabilities. This move is part of a broader strategy to strengthen its AI-driven threat detection and response services. Cisco plans to leverage Splunk products to establish revenue synergies, targeting around 5,000 existing Cisco customers as potential users for Splunk’s offerings. Splunk specializes in AI tools for analyzing data and minimizing cybersecurity risks for businesses.

Valuation Assessment
As for CSCO stock, we believe it is currently fairly valued at its existing price level. Trading at approximately 23 times consensus earnings for FY’25 seems reasonable, even if this year’s growth expectations are subdued. With ongoing investments in recurring revenue streams and a focus on cybersecurity via acquisitions, Cisco is well-positioned. Should an economic downturn occur, we anticipate that Cisco will fare better than its larger tech competitors, given its lower valuation and the steady spending trends in digitization and networking. Our evaluation places CSCO stock at about $57 per share, aligning closely with its current market price. For further insights, check our detailed analyses of Cisco Valuation and Cisco Revenue.

[1] Returns as of 11/14/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.