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Cisco (CSCO) kicked off fiscal 2025 with better-than-expected first-quarter results, beating Wall Street’s revenue and earnings estimates. Despite this, its stock dipped in extended trading due to cautious guidance on future artificial intelligence (AI)-related orders. While management reaffirmed its goal of over $1 billion in AI orders this fiscal year, investors had hoped for more ambitious targets, given Cisco’s strong position in the AI space.
Nonetheless, Cisco’s earnings report revealed several strengths that make it an attractive long-term investment.
1. Strong Recurring Revenue and Growth Metrics
Cisco’s Q1 results revealed a continued transition toward a recurring revenue model. In Q1, the company achieved $13.84 billion in revenue, hitting the high end of its guidance range and slightly surpassing analysts’ expectations of $13.78 billion. The key growth driver behind this performance was the strength in its annualized recurring revenue (ARR), which grew by 22% year-over-year to $29.9 billion. Notably, product ARR increased by 44%.
The company’s subscription-based revenue now constitutes 57% of Cisco’s total revenue, underscoring its shift to a more predictable and resilient income stream. Total software revenue climbed 24% to $5.5 billion, while software subscription revenue increased 35%. This shift toward a subscription model is attractive, as it reduces reliance on one-time hardware sales and provides a more stable and predictable revenue base.
Cisco's remaining performance obligations (RPO)—a key measure of future revenue visibility—grew by 15% year-over-year to $40 billion. With short-term RPO standing at $20.3 billion, the company has a strong backlog that highlights its growth trajectory.
2. Expanding Margins Sets Stage for Strong Profitability
Cisco’s focus on profitability continues to yield impressive results. Its adjusted gross margin reached 69.3%, marking the highest level in over two decades. This was fueled by a combination of favorable product mix and productivity improvements. Product gross margins were solid at 68.9%, up 240 basis points year-over-year.
Thanks to its focus on operating efficiency, its adjusted operating margin of 34.1% exceeded the high end of its guidance range. This operational discipline translated into adjusted earnings per share (EPS) of $0.91, surpassing expectations and reflecting Cisco’s ability to generate solid returns even amid a competitive market environment.
Cisco’s cash flow generation remains robust, enabling the company to return $3.6 billion to shareholders in Q1 through share repurchases and dividends.
3. Positioned to Capitalize on AI and Emerging Technology Trends
Cisco’s role in the AI and data center revolution positions it as a key beneficiary in a rapidly growing market. In Q1, the company’s webscale customers placed over $300 million in AI infrastructure orders, and Cisco projects AI orders to exceed $1 billion for fiscal 2025.
The company’s Silicon One-powered 400G and 800G switches are driving significant interest from hyperscalers. They address the surging demand for scalable, low-power, and high-performance AI networks. These solutions provide customers with the backbone for advanced AI applications and cloud-native services.
Beyond AI hardware, Cisco's security segment is also gaining momentum. Security orders more than doubled in Q1, driven by advanced threat intelligence capabilities from Splunk, which Cisco recently acquired. This reflects Cisco's strategic focus on enhancing its cybersecurity offerings, a key growth area.
Cisco’s investments in observability solutions like ThousandEyes and Splunk Observability further strengthen its position in the enterprise market. These solutions enable businesses to monitor and optimize their increasingly complex IT environments.
Additional Growth Catalysts
Cisco continues to expand its portfolio through targeted acquisitions. In Q1, it closed deals for DeepFactor and Robust Intelligence to bolster its security and AI capabilities. These acquisitions align with Cisco's strategy of enhancing its product offerings.
Cisco’s innovative product launches, including AI servers and AI PODs, are designed to simplify and accelerate AI infrastructure deployment. These solutions are expected to resonate well with enterprises aiming to modernize their IT systems to meet the demands of next-generation technologies.
The Bottom Line on CSCO Stock
Cisco's Q1 performance highlights that the company is on a solid footing, and its business is stabilizing. Its strong recurring revenue growth, expanding margins, and strategic positioning in AI and cybersecurity make it a compelling choice for investors.
Analysts maintain a “Moderate Buy” rating, and Cisco’s long-term outlook remains positive as it capitalizes on the demand for AI, cloud, and security solutions.
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