CSCO Earnings Preview: Watching for recovery in enterprise networking demand
4min read Cisco is set to report its fiscal Q1 2025 earnings on November 13, with expectations for EPS at $0.87 and revenue around $13.77 billion, marking a 6.17% year-over-year decline. This anticipated drop reflects ongoing challenges in Cisco's product segments and sluggish demand from telecommunications and cable service providers. However, Cisco's consistent performance in surpassing revenue estimates for nine consecutive quarters has kept investor optimism relatively high, as the company maintains focus on key growth segments.
Recently, JP Morgan upgraded Cisco to "Overweight" from "Neutral" ahead of the earnings release, citing potential upside from a recovery in Enterprise Networking demand. The firm pointed to an early-stage rebound in networking, with peer companies showing sequential growth in networking revenues and Cisco expected to follow suit. JP Morgan also sees the potential for modest multiple expansion, estimating Cisco’s valuation could reach 18x earnings if demand momentum continues. Cisco's strong positioning in security, especially through recent acquisitions, offers additional upside, with cybersecurity projected to be a high-growth segment over the next year.
Cisco has undertaken significant restructuring efforts, including a reorganization that will see a 7% reduction in its workforce. The company expects to incur up to $1 billion in pre-tax charges for severance and related costs, with around $700-$800 million of these charges reflected in Q1. This restructuring is part of Cisco’s pivot to streamline operations and focus resources on high-growth areas such as AI, cloud, and cybersecurity, aligning with its broader long-term strategy.
Price action has been strong, with Cisco’s stock up approximately 28% since mid-August, outpacing both the S&P 500 and its sector peers. Despite this run, Cisco’s valuation remains somewhat stretched with a forward P/E of 16x, which JP Morgan views as justified given its recovery trajectory in Enterprise Networking.
Cisco’s investment in AI, particularly in AI-powered networking and security, is a promising growth avenue. With over $1 billion in AI-related orders and another $1 billion in the pipeline for FY25, the company is targeting significant market opportunities. The total AI market opportunity for Cisco’s addressable products is projected at $950 billion, with anticipated compound annual growth rates of 6% in current markets and 16% in expansion markets through 2027, making AI a potential catalyst for future earnings.
The company’s Security segment, buoyed by solutions like XDR and Multicloud Defense, has performed strongly, with first-quarter revenue for Security expected to reach $1.816 billion. The acquisition of Splunk further enhances Cisco's positioning in cybersecurity, adding exposure to a market with a projected worth of $118 billion. As cybersecurity remains a priority for enterprise clients, Cisco’s continued focus in this space should support its revenue growth and diversification efforts.
Investors are also watching Cisco’s share buyback and dividend programs, which together provide a shareholder yield of around 6.1%. This return is attractive given Cisco’s revenue headwinds, but sustained dividend growth will depend on the success of its reorganization and future earnings growth, particularly in its networking and security segments. Cisco’s dividend and buyback initiatives signal confidence in its cash flow, supported by demand recovery and operational improvements.
Cisco's Q2 results indicated a steady recovery amid inventory headwinds and strong demand across its diverse portfolio, leading to an 8% jump in its stock. The company reported earnings per share (EPS) of $0.87, surpassing the consensus estimate of $0.85, although revenue declined by 10% year-over-year to $13.64 billion, in line with market expectations. Analysts and investors responded positively due to the firm’s consistent order growth, attributed partially to its recent acquisition of Splunk, which added $4.3 billion to Cisco’s Annualized Recurring Revenue (ARR), boosting ARR by 22% year-over-year.
One of the highlights of Cisco's quarter was the impact of its $28 billion acquisition of Splunk, which supports growth in the security and observability markets, areas experiencing high demand. Cisco’s Hypershield, an AI-driven security platform, has also been well-received, helping it secure over $1 billion in AI-related orders, with expectations to double this figure in fiscal year 2025. This aligns Cisco with industry trends, especially as enterprises ramp up spending on infrastructure upgrades to handle AI workloads.
Cisco’s guidance for Q1 and FY25 was in line with market expectations, with Q1 EPS projected at $0.86-0.88 and revenue between $13.65 and $13.85 billion. For FY25, Cisco forecasts EPS of $3.52-3.58 and revenue of $55-56.2 billion, demonstrating confidence in demand normalization across its core markets. The company also plans a 7% workforce reduction to streamline operations, aiming to reallocate resources to high-growth areas like AI, cloud, and cybersecurity.
Growth in Cisco's security and collaboration segments was particularly strong, projected at 6% and 12% organically in FY25, with reported growth boosted by the Splunk acquisition. Networking revenue is expected to grow double digits for the remainder of FY25, partly rebounding from last year’s weak order backlog. Investors noted these positive trends, seeing the company as well-positioned to capitalize on demand recovery, especially as customer destocking pressures appear to be easing.
Cisco's relationship with Apple remains stable, with steady demand expected from the tech giant, which supports Cisco's networking and cloud services. However, Cisco’s AI involvement, while growing, is relatively small in its overall operations compared to peers like Arista Networks. Cisco’s AI-related orders, though reaching $1 billion, remain a minor part of its revenue but are viewed as an essential growth vector that may scale up in the future.
Investors are also closely watching Cisco’s evolving strategy under Jeetu Patel, who is centralizing product development around a "platformization" strategy to unify various offerings. This reorganization, focused on integrating AI, security, and data center modernization, appears to be resonating well with customers and could enhance Cisco’s competitive positioning.
The main drivers behind Cisco’s optimism include normalized inventory levels, demand stabilization, and significant advances in security and cloud computing. Analysts remain cautiously optimistic, noting that while macroeconomic challenges persist, Cisco’s diversification and focus on high-growth sectors offer a solid foundation.
For investors, the bull case centers on Cisco's successful integration of Splunk and its strategic pivot toward AI and cloud, which could drive revenue growth and margin expansion. The bear case focuses on potential risks from a challenging macro environment and competition from peers better positioned in AI. The neutral case reflects steady growth and operational efficiency improvements but hinges on Cisco’s ability to sustain demand across its key segments.
Cisco’s earnings will offer insights into how effectively the company is navigating both near-term demand fluctuations and positioning itself in high-growth areas. The bull case hinges on a successful recovery in networking demand, driven by new AI and security capabilities. The bear case is marked by ongoing product challenges and valuation concerns, while the neutral perspective suggests steady performance bolstered by cost-saving initiatives but tempered by high expectations.