The Worst May Be Over for Cisco After Beating Estimates in Q4

Key Points

• Cisco shares rose nearly 7% after the firm beat analysts' earnings and revenue estimates. 
• The firm's growth in new orders for the quarter is a sign the worst may be over.
• Even though the market was satisfied, Wall Street analysts didn't move price targets much.

Cisco Systems NASDAQ: CSCO is a U.S. technology firm and is the world’s largest company in the communications equipment industry. Shares have seen significant underperformance compared to its sector, down 4%. The Communication Services Select Sector SPDR Fund NYSEARCA: XLC is up nearly 19%.

The company has underperformed as it struggles to keep up with competitors offering better cloud data center solutions. In particular, Arista Networks NYSE: ANET has taken advantage of this fast-growing market, catering to what these customers want. As a result, it has been among the hottest stocks in the market over the past 52 weeks, up over 100%.

However, Cisco posted better-than-expected results in its fiscal Q4 2024 earnings, released on Aug. 15. Shares were up nearly 7% following the release. Is this a sign that things are turning around for Cisco, or is it simply a blip on the radar? I’ll analyze this by first explaining Cisco’s business and reviewing the earnings report. I’ll detail some areas for optimism, review analyst price target changes, and provide some outlook on the stock.

Cisco: A Giant Player in Networking Solutions

Cisco’s operating segments are based on geography, but a more beneficial way to look at the company is through its product categories. In the latest quarter, 50% of the company’s revenues came from its Networking products.

This category provides solutions for switching, enterprise routing, and wireless. These solutions help send data between computer networks, manage the flow of data within a network, and enable devices to connect to the internet wirelessly.

Another 13% of revenues came from its Security products, and 8% from its Collaboration products. Additionally, 28% of revenue came from services related to all its product categories.

Markets Pleased as Cisco Beats Estimates on Earnings and Revenue

Cisco’s adjusted earnings per share (EPS) posted a positive surprise of 2.5%, coming in at $0.87. It fell 24% from the previous year. Sales also came in slightly less than 1% above estimates at $13.6 billion and fell 10%.

The company’s adjusted EPS guidance for 2025 was in line with estimates at $3.55. Networking revenue decreased 28%; however, security revenue shined, jumping 81%. This was largely due to the company’s acquisition of Splunk. Without it, revenue would have increased only 6%.

Cisco also announced it is laying off another 7% of its workforce, bringing the total number of layoffs this year to about 9,000. This follows layoff announcements for another legacy tech industry giant, Intel NASDAQ: INTC, which will cut 17,500 jobs in its fiscal year 2025.

Several Metrics Show Reasons for Optimism

One of the more positive developments for Cisco was its 6% increase in organic order growth, an indicator of future revenues. Orders didn’t grow in Q3, largely due to customers having too much inventory they had yet to install. This shows that organic revenue levels may be bottoming. Including Splunk, the number increased 14%.

The company has also seen a strong increase in remaining performance obligations, which increased 18%. This is revenue that the company has contracted but cannot recognize yet. These factors could provide an opportunity for Cisco’s core business to stop declining.

The firm also showed progress in transitioning to a more software-based company. Software revenue grew 9% and now makes up 34% of total revenue. Investors should view this positively since software margins are typically higher than hardware margins, which is Cisco's historical business.

Outlook and Updated Wall Street Price Targets

The company's shares are trading at a forward price-to-earnings ratio of 13.6, below 80% of U.S. tech firms. Wall Street expects sales to grow very mildly over the next three years, at only around 4% annually. Adjusted EPS is expected to increase by 6% annually.

Given these relatively low expectations, it's certainly possible the firm could outperform. From 2021 to 2023, the company grew adjusted EPS by over 9% per year. The positive future-looking metrics in the firm’s latest earnings report could support higher-than-expected growth. Additionally, Splunk will continue to provide growth and increased capabilities.

Overall, Wall Street analysts increased their average price target for Cisco by less than 1% after the earnings release. This suggests these analysts were not as excited by the earnings as the market. Among five analysts who updated their target, the implied upside for the firm sits at 9%.