Cisco (CSCO +7%) is starting to overcome the inventory challenges that hindered its growth during FY24 (Jul), boosting investor confidence. Consequently, CSCO is rebounding strongly from its one-year lows.
- Despite inventory and economic issues in Q4, CSCO reported adjusted EPS of $0.87, a 24% drop yr/yr, and revenues of $13.64 billion, a 10% decline. However, total product orders grew by 14%, with 8 points attributed to Splunk, CSCO's $28 billion acquisition closed in March. This indicates that inventory adjustments are nearly complete. Demand was balanced across regions, with product orders up 6% in the Americas and Europe and 8% in Asia. All customer markets showed strength, especially the public sector.
- Splunk could be a significant differentiator. Similar to its competitor Datadog (DDOG, Financial), Splunk is capitalizing on high demand for security and observability, crucial for monitoring data sets and identifying issues. CSCO's acquisition of Splunk came at an opportune time, as DDOG noted last week that demand is strong across enterprises and stable among small and medium-sized businesses.
- AI is also helping CSCO stand out. The company's AI-powered security system, Hypershield, is receiving positive feedback from early-access customers. CSCO has surpassed $1.0 billion in AI orders and expects another $1.0 billion in AI product orders in FY25. However, AI-related demand remains a small part of CSCO's overall operations.
- CSCO's FY25 guidance suggests continued upward momentum. The company expects adjusted EPS of $3.52-3.58 and revenues of $55.0-56.2 billion, a 3% year-over-year improvement at the midpoint. Additionally, CSCO announced a roughly 7% workforce reduction to streamline operations and focus more resources on high-growth areas like AI, cloud, and cybersecurity, all included in its FY25 outlook.
CSCO's Q4 report was still affected by a challenging macroeconomic environment, leading to high inventories and increased budget scrutiny. However, the market is focusing more on CSCO's FY25 guidance and its steady customer demand, balanced portfolio strength, and enterprise infrastructure upgrades for AI.
The stock is still lagging behind peers like Hewlett Packard Enterprise (HPE, Financial) and Ciena (CIEN, Financial), both of which will report earnings soon. The gap is even more noticeable with Arista Networks (ANET, Financial), which is better leveraging AI opportunities, supported by top customers Meta Platforms (META, Financial) and Microsoft (MSFT, Financial). Nonetheless, CSCO is making significant progress, with three of the top four hyperscalers using its Ethernet AI fabric and plans to double AI product orders in FY25. After a prolonged period of challenges, CSCO appears to be on the verge of a substantial recovery.
