Cisco stock drops after mixed fiscal Q1 earnings

Cisco (NASDAQ:CSCO) stock was falling on Thursday, down roughly 2.5% after the technology pioneer reported mixed results in its fiscal first quarter.

The technology pioneer that was once the most valuable company in the world back in 2000 has much less cache among investors these days, trading at around $58 per share.

The mixed results in the quarter stem from the fact that Cisco beat earnings and revenue estimates but posted year-over-year declines.

Revenue fell 6% compared to the same quarter a year ago to $13.84 billion, but it was slightly better than the $13.78 billion FactSet estimates. It was also at the high end of its own revenue guidance for the quarter.

Net income also declined year-over-year, dropping 25% to $2.7 billion, while earnings per share plummeted 24% to 68 cents per share. On an adjusted basis, net income fell 19% to $3.7 billion, while earnings per share dropped 18% to 91 cents per share. The adjusted EPS topped estimates of 87 cents per share.

However, there are some elements in the report that should pique investors interest.

$1 billion in AI orders in fiscal 2025

The drop in revenue was mainly due to Cisco’s products business line, which is the bulk of its revenue and includes its routers and switches and products that connect networks. The products division saw revenue drop about 9% to $10.1 billion.

But the company has seen an acceleration in product orders as demand normalizes. In the quarter, product orders were up 20% year over year.

Its services business, on the other hand, generated $5.7 billion in revenue, up about 6% year-over-year. This business includes its consulting, support, information technology, and digital intelligence and AI solutions.

“Cisco is off to a strong start to fiscal 2025,” Chuck Robbins, chair and CEO of Cisco, said in the earnings release. “Our customers are investing in critical infrastructure to prepare for AI, and with the breadth of our portfolio, we are uniquely positioned to capitalize on this opportunity.”

On the earnings call, Robbins said the company expects a boost from its AI-related offerings. In fiscal 2025, Cisco is anticipating more than $1 billion in AI-related orders.

“Findings from our new global AI partner study show that IT partners around the world are anticipating a transformative wave of AI technology demand driven by infrastructure, cybersecurity, and customer experience, which they expect to fuel the majority of their revenue over the next four to five years,” Robbins said on the call. “With the breadth of our portfolio, we are uniquely positioned to capitalize on this AI technology demand as customers are investing in their critical infrastructure to prepare for AI.”

In Q1, high expenses put a dent in earnings, as costs were up 28% in the quarter to $6.8 billion, or 48.9% of revenue. Adjusted operating expenses were $4.9 billion, up 9%, and were 35.2% of revenue. The operating margin was 17%, down from 19.2% in the previous quarter. Adjusted operating margin was 34.1% in Q1, up from 32.5% the previous quarter.

Some of the expense increases stem from recent acquisitions of Splunk, DeepFactor, and Robust Intelligence – the latter two of which closed in Q1. Each of these companies are involved in cyber and network security, which could be a growth driver for Cisco as they offer complementary capabilities and expand its offerings.

Is this a buying opportunity for investors?

Cisco raised its guidance for fiscal 2025, boosting revenue projections to $55.3 billion to $56.3 billion, up from the previous range of $55.0 billion to $56.2 billion.

Its target for adjusted earnings was bumped up to $3.60 to $3.66 per share, up from $3.52 to $3.58 EPS.

Further, Cisco’s GAAP EPS target for the full year is $2.26 to $2.38, which is significantly higher than the previous guidance of $1.93 to $2.05 EPS for fiscal 2025.

And for Q2, Cisco anticipates $13.75 billion to $13.95 billion in revenue, which would be around the same at the midpoint as Q1. Adjusted EPS is expected to be 89 cents to 91 cents, same as Q1 on the high end.

The outlook led to a slew of price target upgrades from almost a dozen Wall Street analysts, including Morgan Stanley and Bank of America.

With its reasonable P/E ratio of 23 and a forward P/E of 16, and a good dividend that has increased 13 straight years, Cisco might be worth a look for investors looking for a decent value with some upside.