Cisco Q2 Earnings Preview: A Critical Look at the First January-end Report

Cisco Systems (NASDAQ: CSCO) is set to release its fiscal Q2 2025 earnings after the closing bell on Wednesday, February 12. This will be the first January-end earnings report, offering critical insight into how the tech sector entered 2025 and providing investors with an early read on enterprise spending trends, AI infrastructure demand, and macroeconomic conditions.

Expectations for Q2

Analysts are projecting Cisco to report earnings per share (EPS) of $0.91 on revenue of $13.87 billion, which would reflect year-over-year growth of 5% in EPS and 7% in revenue. Operating income is expected to come in at $4.5 billion, up 8% year-over-year.

Cisco previously guided for Q2 revenue in the range of $13.75 billion to $13.95 billion, which is largely in line with consensus estimates. The company also forecasted adjusted EPS of $0.89 to $0.91, slightly above the previous consensus of $0.87.

For full-year 2025, Cisco raised its revenue guidance slightly to $55.3 billion to $56.3 billion, up from its prior forecast of $55 billion to $56.2 billion. The company also expects full-year EPS to come in at $3.66, reflecting a modest 1% annual increase.

Key Drivers and Issues to Watch

Order Growth and AI Momentum

One of the most critical areas investors will watch is Cisco’s order growth. Last quarter, Cisco reported strong product orders, with total order growth accelerating to 20% year-over-year, including a 33% surge in enterprise orders and a 28% increase in service provider and cloud orders. Investors will be looking for confirmation that this momentum is continuing into Q2.

AI remains another key growth driver. Cisco reported $300 million in AI-related orders last quarter and is on track to exceed $1 billion in AI orders for the fiscal year. Management’s commentary on AI demand, particularly for data center networking and switching solutions, will be a major focus.

Splunk Integration and Security Growth

The $28 billion acquisition of Splunk has positioned Cisco as a stronger player in the cybersecurity space. Security revenue doubled year-over-year in Q1, largely due to Splunk’s contribution. Analysts will be looking for updates on integration progress and whether the security segment can sustain its rapid growth trajectory.

Enterprise and Federal Spending Trends

Enterprise networking demand has been a focal point for Cisco, as the segment has struggled in recent quarters due to an inventory correction. The company signaled some improvement last quarter, but investors will want to see if orders continue to rebound. Additionally, federal spending has been weaker, with Cisco noting last quarter that some orders were delayed rather than canceled. Any improvement in government-related demand could serve as an upside catalyst.

Stock Performance and Valuation

Cisco shares have been strong leading into this earnings report, recently testing their post-2000 high of $64.28, a level last seen in December 2021. The stock fell from $64 to $40 during the 2022 bear market but has recovered steadily since.

At a price of around $62, Cisco is trading at 15-16x forward earnings, which is reasonable compared to its expected annual EPS growth of 5% over the next three years. The stock also trades at 4.75x revenue, with price-to-cash-flow and price-to-free-cash-flow multiples of 21x and 24x, respectively.

Morningstar assigns a $50 fair value estimate on Cisco, while other analysts are more optimistic, with price targets in the $70+ range. Citi recently placed a positive catalyst watch on the stock, citing an improving outlook for its networking business. Meanwhile, Melius Research upgraded Cisco to a Buy, arguing that the AI boom is still in its early stages and Cisco is well-positioned for long-term growth.

Cisco Q3 Recap: Strong Orders, AI Momentum, and Subscription Growth Ahead of Q4 Earnings

Cisco Systems (CSCO) reported a better-than-expected Q3 (fiscal Q1 2025) back in November, with revenue and earnings per share (EPS) surpassing analyst estimates. While total revenue declined 5.6% year-over-year to $13.84 billion, it was slightly ahead of the $13.77 billion consensus estimate. Adjusted EPS came in at $0.91, beating the $0.87 forecast. Despite the solid results, shares dipped slightly as the company faced a high bar following a strong rally in its stock price ahead of earnings.

Key Performance Metrics and Segment Breakdown

- Total revenue: $13.84 billion (-5.6% YoY, beat estimates of $13.77 billion)

- Product revenue: $10.11 billion (-9.2% YoY)

- Service revenue: $3.73 billion (+6% YoY, in line with estimates)

- Networking revenue: $6.75 billion (-23% YoY)

- Security revenue: $2.02 billion (+100% YoY, driven by Splunk acquisition)

- Collaboration revenue: $1.09 billion (-3% YoY)

- Adjusted gross margin: 69.3% (beat 67.6% estimate)

- Adjusted operating margin: 34.1% (beat 32.6% estimate)

- Remaining performance obligations: $39.99 billion

- Annual recurring revenue (ARR): $29.9 billion (+22% YoY)

A major highlight was the surge in security revenue, which doubled year-over-year, largely due to the impact of Cisco’s $28 billion acquisition of Splunk. The company’s annual recurring revenue (ARR) grew 22%, with product ARR up 42%, showing strong traction in Cisco’s subscription-based revenue model.

Order Growth Signals Demand Recovery

One of the most positive takeaways from the Q3 report was the return to real order growth, particularly in the AI and cloud infrastructure segments. Total product orders grew 20% year-over-year, a notable acceleration from the 14% growth in the prior quarter. Organic order growth (excluding acquisitions) was up 9%.

- Enterprise product orders surged 33%, led by strong demand in the Americas and Europe.

- Service provider and cloud product orders jumped 28%, including triple-digit growth in webscale customers.

- Networking orders saw double-digit growth, particularly in switching, wireless, and internet infrastructure.

Cisco’s AI-related business remains a bright spot, with the company on track to exceed $1 billion in AI-related orders this fiscal year. The company also highlighted strong customer interest in its 400-gig and 800-gig data center switching solutions based on its Silicon One architecture.

Guidance and Market Reaction

Cisco raised its full-year revenue guidance slightly to $55.3 billion to $56.3 billion, up from a prior range of $55 billion to $56.2 billion. The company also forecasted Q2 revenue of $13.75 billion to $13.95 billion, in line with expectations, and Q2 EPS of $0.89 to $0.91, above the $0.87 consensus.

Despite the strong order growth and AI-driven tailwinds, Cisco’s stock fell slightly following the earnings release, likely due to profit-taking after a nearly 30% rally in the weeks leading up to the report. Investors were also looking for clearer signs of an enterprise networking refresh cycle, which has yet to materialize in a meaningful way.

What to Watch for in Q2 Earnings

With Cisco set to report Q2 results tonight, investors will be closely monitoring several key factors:

1. AI and cloud order growth. Given last quarter’s momentum, investors will look for continued strength in AI-related infrastructure demand.

2. Security segment performance. The Splunk acquisition has been a major driver, and further evidence of growth could support a bullish case.

3. Enterprise networking demand. Orders rebounded in Q3, but the key question remains whether enterprise customers are fully ramping up spending.

4. Federal spending trends. Cisco noted last quarter that federal orders were delayed, not lost. If spending recovers, it could provide another boost.

5. Profitability metrics. Gross margin and operating margin outperformed expectations in Q1, and investors will want to see if the trend continues.

Overall, Cisco’s strong order growth, increasing subscription revenue, and AI tailwinds provide a solid foundation heading into tonight’s Q4 report. However, expectations remain high, and investors will want to see signs of sustained revenue acceleration for the stock to move higher.

Cisco’s Q2 earnings report will serve as an important checkpoint for investors looking to gauge early 2025 tech sector trends. With expectations for improving revenue growth and continued AI momentum, the company appears to be emerging from its recent inventory correction.

The stock has been testing key resistance levels, and a strong report could push it to new multi-decade highs. However, any signs of slowing order growth or weaker-than-expected AI demand could lead to downside pressure. Investors will be watching closely for Cisco’s commentary on AI, networking demand, and enterprise spending trends as they assess the company’s longer-term growth trajectory.