Cisco tops expectations raises guidance as AI offsets sluggish government spend

Cisco Systems (CSCO) delivered a strong fiscal second-quarter earnings report, surpassing analyst expectations on both revenue and earnings per share (EPS). The company posted an adjusted EPS of $0.94, beating consensus estimates of $0.91, and revenue of $14 billion, slightly ahead of the expected $13.87 billion. This marks a 9% year-over-year increase in revenue, breaking a four-quarter streak of declining sales. Cisco's product revenue grew 11% to $10.23 billion, led by gains in networking ($6.85 billion) and security ($2.11 billion), the latter benefiting from the acquisition of Splunk. Service revenue was up 5.6% to $3.76 billion. Additionally, deferred revenue rose 8% year-over-year to $27.8 billion, highlighting future sales strength.

The earnings beat was driven by broad-based demand for Cisco’s core infrastructure products, despite headwinds in government spending. The company saw product orders rise 29% year-over-year, though excluding the contribution from Splunk, new orders were up 11%. Cisco is benefiting from increased corporate investment in networking infrastructure to support artificial intelligence (AI) applications, helping offset slower government spending. Notably, AI infrastructure orders exceeded $350 million in the quarter, bringing the fiscal year total to approximately $700 million. CEO Chuck Robbins emphasized that as AI becomes more widespread, Cisco is well-positioned to help customers scale network infrastructure, enhance data capacity, and implement AI-driven security measures.

Cisco also demonstrated its commitment to shareholder returns. The company raised its quarterly dividend to $0.41 per share, representing a 3% increase. Furthermore, Cisco authorized an additional $15 billion in share repurchases, bringing the total buyback authorization to $17 billion. In the second quarter alone, the company returned $2.8 billion to shareholders through dividends and stock buybacks. These capital return initiatives highlight Cisco’s confidence in its long-term growth trajectory and cash flow generation capabilities.

The stock responded favorably to the earnings announcement, surging 6.7% in after-hours trading. This move extends Cisco’s 2025 gains, as the stock had already risen 5.5% year-to-date prior to the earnings report. Investors were encouraged by the company's better-than-expected results and its improved guidance. Cisco raised its full-year revenue forecast to a range of $56 billion to $56.5 billion, up from the prior range of $55.3 billion to $56.3 billion, and ahead of the $55.97 billion consensus estimate. Adjusted EPS guidance for fiscal 2025 was also lifted to $3.68-$3.74 from the prior $3.60-$3.66, surpassing the consensus estimate of $3.66.

Cisco’s product order strength was a key highlight, but there are still concerns about government spending. While the Department of Defense (DoD) remains Cisco’s largest federal customer, making up 75% of its government sales, overall government spending has been sluggish. Civilian agencies, which account for the remaining 25% of Cisco’s federal business, have been more hesitant to commit to new projects. CFO Scott Herren noted that government demand has been weaker than historical levels, but the strength in corporate IT spending has helped offset this softness. Cisco’s exposure to AI-driven networking upgrades has provided a new avenue for growth, as enterprises continue investing in next-generation infrastructure.

Deferred revenue, a key indicator of future sales, showed solid growth, reaching $27.8 billion, an 8% year-over-year increase. Cisco's remaining performance obligations (RPO), which represent contracted revenue yet to be recognized, rose 16% to $41.27 billion, also above expectations. This growth underscores the company’s transition toward a more predictable, subscription-based revenue model, which has been a long-term strategic focus. Additionally, Cisco’s shift toward software and services, particularly through its Splunk acquisition, has further reinforced this transformation. Notably, without Splunk’s contribution, total revenue would have declined 1% year-over-year.

Looking ahead, Cisco provided strong guidance for the fiscal third quarter. The company expects revenue between $13.9 billion and $14.1 billion, slightly above the consensus estimate of $13.88 billion. Adjusted EPS guidance was set between $0.90 and $0.92, in line with estimates. Gross margins are expected to remain solid, with an adjusted gross margin forecast of 67%-68%. Cisco also noted that its guidance accounts for the potential impact of proposed tariffs on goods imported from Canada, Mexico, and China. While these tariffs could raise costs, Cisco’s diversified supply chain and contract manufacturing strategy are expected to mitigate major disruptions.

Overall, Cisco's second-quarter results reflect a strong turnaround, driven by improved corporate IT spending, AI-related networking demand, and the integration of Splunk. While government spending remains a headwind, the company’s robust order growth and subscription-based revenue expansion provide a solid foundation for continued growth. The increased dividend and expanded buyback program further reinforce management’s confidence in Cisco’s future performance, making the stock a compelling play for investors seeking stability and growth in the networking space.