Reversing a modest after-hours decline,
shares are trading higher Thursday, reaching their highest level in two decades.
The rally comes as investors shrug off near-term concerns about component shortages and elevated shipping costs, focusing instead on accelerating growth, as more of the company’s revenue shifts to software from hardware and enterprise customers boost network infrastructure spending.
Cisco shares (ticker: CSCO) are up 2.8%, at $56.69, in recent trading. They had earlier traded as high as $57.14, a new 52-week high and their highest level since the dot-com bubble years.
After the close of trading on Wednesday, Cisco posted revenue for its fiscal fourth quarter ended July 31 of $13.12 billion, up 8% from a year earlier and at the high end of the company’s forecast range of 6% to 8% growth. Non-GAAP profits were 84 cents a share, toward the high end of the company’s guidance range of 81 to 85 cents a share.
The networking giant gave strong evidence that demand for its wares is picking up after suffering a slowdown in 2020 as many customers cut spending during the pandemic. Cisco said orders were up by double digits across all customer markets and geographies. Product orders were up 31% overall, the highest level in more than a decade. That includes 25% growth in orders from enterprise customers, 41% growth from smaller commercial customers, and a stunning 160% growth from cloud customers.
Cisco also said that “remaining performance obligations,” a measure of work contracted for but not yet delivered, was up 9%, to $30.9 billion. RPO is a measure often used by enterprise software companies as an indicator of future performance. Cisco notes that the company had $4 billion in software revenue in the latest quarter, bringing the total for the full year to $15 billion. CEO Chuck Robbins noted on a call with investors late Wednesday that Cisco has quietly become one of the world’s largest software vendors.
One source of lingering concern is the impact supply shortages are having on margins. In the July quarter, non-GAAP gross margin was 65.6%, which was above the company’s projected range of 64% to 65%, a beat that the company said reflected a positive product mix. But Cisco expects results for the October quarter to show a more pronounced impact from higher component and shipping costs.
The company sees revenue growth for the quarter of 7.5% to 9.5%, with non-GAAP profits of 79 to 81 cents a share, at the midpoint a penny shy of Street consensus, with gross margins falling back to between 63.5% to 64.5% range. Cisco warned that supply cost pressures would persist for at least the first half of fiscal 2022, and potentially into the second half of the year.
Cisco surprised the Street by offering full year guidance for fiscal 2022—the first time in recent memory that it has provided a detailed outlook for the coming year. The company sees full-year revenue up 5% to 7%, a little above the old Street consensus at 4.4%. At the middle of the range, the forecast implies revenue of $52.8 billion, above the old Street consensus of $51.9 billion. Cisco sees full-year profits of $3.38 to $3.45 a share, at the midpoint a smidgen ahead of consensus at $3.40 a share.
The Street was generally enthusiastic in their reviews of the quarter.
New Street Research analyst Pierre Ferragu repeated his Buy rating and $65 target price on Cisco shares. “Underlying trends are intact,” he writes in a research note. “Cisco still has a long run ahead of recovering revenue growth and margin expansion.”
Jefferies analyst George Notter likewise reiterated a Buy rating, while upping his target price to $63 from $56. “Despite current supply chain challenges, Cisco’s July results and guidance offered a view into the continued post-Covid recovery and underlying strength from Digital Transformation efforts at their customers,” Notter writes in a research note. “We continue to see the risk/reward favorably. We expect the multiple to expand as the mix of recurring sales increases.”
Barclays analyst Tim Long stays bullish, too, repeating an Overweight rating and lifting his target to $62 from $55. He notes the guidance miss on the EPS line due to expected margin pressures, but argues that the company is being conservative in its forecasting. Long sees a “durable top-line recovery” that is likely to outlast short-term cost pressures. The analyst is bullish on the company’s improved performance in the cloud sector and its growing software revenue and finds the valuation “attractive.”
Citigroup analyst Jim Suva is more cautious. He keeps his Neutral rating, though he boosts his target price to $55 from $50. He thinks some investors will likely have concerns about “the lack of EPS leverage” in the company’s outlook, although he concedes that he is “impressed with Cisco’s results,” in particular the strong order growth.
Write to Eric J. Savitz at [email protected]