Cisco_ F2Q25 (Jan-end) Review_ Cyclical Recovery Momentum Confirmed in Results_ Outlook; Impact of Key Investor Concerns Lower Than Feared; Reiterate OW. Thu Feb 13 2025

Summary of Cisco's F2Q25 Earnings Call Company Overview - Company: Cisco - Industry: IT Hardware / Telecom & Networking Equipment Key Points from the Earnings Call Financial Performance - F2Q25 Results: Revenue reached $13.99 billion, exceeding expectations and the guidance range of $13.75-$13.95 billion, driven by stronger-than-expected Networking revenue [2][13] - Earnings Per Share (EPS): EPS was $0.94, above JP Morgan's estimate of $0.92 and consensus of $0.91 [2][13] - Gross Margins: Gross margins were reported at 68.7%, aligning with expectations [2][13] Demand and Market Trends - Cyclical Recovery: The demand cycle is improving across all customer verticals, with significant revenue upsides in Core Networking, indicating confidence in FY25 revenue growth [2][9] - Enterprise Spending: There is a notable increase in spending from Enterprise customers focused on modernizing infrastructure, particularly in Datacenter and Campus segments [2][9] - Cloud Demand: Strong demand from Hyperscalers, with orders surpassing $700 million for the first half of the fiscal year, expected to exceed the $1 billion target [2][9] AI and Security - AI Adoption: Increased interest in integrated systems (Nexus, UCS, AI Pods) is expected to drive demand as Enterprises invest in AI [2][9] - Security Segment: Security revenue grew by 4% year-over-year, although concerns remain regarding the impact of revenue recognition practices [2][9] Guidance and Outlook - F3Q25 Guidance: Revenue is guided in the range of $13.9-$14.1 billion, with EPS expected between $0.90-$0.92 [2][14] - FY25 Outlook: Full-year revenue guidance raised to $56.0-$56.5 billion, despite anticipated tariff pressures on gross margins [2][14] Price Target and Valuation - Price Target Increase: The price target for December 2025 has been raised to $73 from $69, reflecting better revenue momentum and potential earnings upside [2][10] - Valuation Multiple: A target P/E multiple of approximately 17x is applied to CY26E EPS, which is below the historical peak of 18x during cyclical recoveries [2][10] Risks - Industry Risks: Increased reliance on software may lower barriers to entry for new competitors, posing a risk to established players like Cisco [2][19] - In-sourcing by Enterprises: Large enterprises may insource network infrastructure capabilities, potentially reducing opportunities for network equipment suppliers [2][20] - Pricing Pressure: Moderating inflation could lead to pricing pressures on IT equipment, impacting revenue and earnings [2][21] - Integration Risks: Future acquisitions may pose integration risks, which could affect Cisco's execution and financial performance [2][22] Additional Insights - Security as a Wild Card: The security segment is viewed as a critical area to watch, with strong execution potentially leading to positive sentiment and revenue growth [2][9][15] This summary encapsulates the key insights from Cisco's F2Q25 earnings call, highlighting financial performance, market trends, guidance, valuation, and associated risks.