Cisco Shares Are Surging – Here’s Why

Ticker Symbol: CSCO

Cisco Systems Inc., the technology behemoth that once upon a time used to be the largest company in the world by market capitalization, provided revenue guidance that surpassed Wall Street’s expectations and reported record adjusted earnings for fiscal 2022. The maker of routers, switches, and data center products said that the chip shortages that have held back the company for the better part of the past two years have eased and would allow the firm to fill more orders. Shares surged by nearly 7% to $49.75 on the back of the good news.

The company reported fiscal fourth quarter revenue of $13.10 billion, flat from the same period last year but well ahead of Wall Street’s estimates for $12.7 billion. Product revenue came in at $9.7 billion, ahead of the estimated $9.41 billion as the aforementioned chip shortages eased up during the quarter. Cisco’s largest revenue source, Secure Agile Networks sales totaled $6.1 billion, well above the expected $5.8 billion. End-to-End security, the fastest growing part of the company’s product base, saw sales grow by 20% year over year to $984 million, crushing estimates of $895 million.

Service revenue, which is more critical given the segments higher margins, posted a more modest beat, coming in at $3.41 billion, flat from last year, and above the estimated $3.35 billion. Total software revenue represented almost 30% of total revenue. A higher relative proportion of software sales would allow the company to produce stronger margins going forward. Cisco also reported that annualized recurring revenue (ARR) was up 8% year over year, while remaining performance obligations (RPO) was up 2%. Backlog ARR and RPO provide visibility and confidence in the company’s future revenue projections.

The company reported gross margins that were slightly weak by historical standards, reporting 63.3% for the quarter, versus the 65.6% reported in the fourth quarter of fiscal 2022. Adjusted earnings per share was 83¢ versus the estimated 82¢. Crucially, Cisco also provided strong first quarter guidance that came in ahead of investor expectations. It sees revenue for the period ending on October 31^st to be up between 2% to 4%, while analysts saw revenue staying flat. For the full fiscal year, the company expects revenue to be up 4% to 6%, while the expectation was for revenue to grow by 3.3%.

Management similarly remained upbeat in its commentary and analysis of the company’s trajectory. Chief Financial Officer Scott Herren said that the company saw no signs of order cancellations and slow-down in technology spending on the company’s products. Further, the firm produces products that are more critical for enterprise operations, such as security and networking equipment, than many other hardware focused companies. While the majority of the chip shortages have eased, other components would still be hard to source, and margins would therefore be tighter this year according to the CFO.

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