Cisco Earnings: Positive Guidance and Splunk Inclusion Align With Our Long-Term Thesis

Key Morningstar Metrics for Cisco Systems

• Fair Value Estimate: $50.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Cisco Systems’ Earnings

We maintained our $50 fair value estimate for shares of Cisco Systems CSCO after its fiscal third-quarter results aligned with our expectations, and we integrated the acquisition of Splunk (closed in March) into our model. Cisco continues to see weak networking demand, stemming from customer overordering in 2022 and 2023. Splunk added some inorganic revenue, and management raised its full-year guidance to include the acquisition. Shares rose about 5% after hours, which we believe is due to a raised fiscal year guide and positive commentary around networking demand returning. We’d already forecast a recovery in fiscal 2025 and view the guidance raise as entirely inorganic. We reiterate our belief that the Splunk deal is value-neutral and continue to see Cisco shares as fairly valued.

Sales dropped 13% year over year and 1% sequentially to $12.7 billion in the quarter, including the inorganic contribution from Splunk. Organically, sales fell about 3% more than that. Cisco’s primary networking business continues to see slower orders and declined 27% year over year. Security and observability revenue rose double digits with Splunk included, but both rose organically too, which we see as positive and consistent with prior quarters. Gross and operating margins rose about 100 basis points sequentially, but management expects these to come back down in the next quarter with some higher integration costs.

Fiscal fourth-quarter guidance was in line with our model, and we view it positively, with an implied return to sequential growth both with Splunk and organically. Management raised its fiscal year guidance to account for Splunk’s inclusion, implying consistent full-year organic guidance. At the midpoint, fiscal fourth-quarter sales of $13.5 billion imply 6% sequential growth (roughly 2% organically).