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Stock Analyst Update

Cisco’s Strong Q4 Beats Consensus, but Meets Our Expectations

Supply constraints continue to dictate Cisco’s results in a robust demand environment.

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We maintain our $54 fair value estimate for Cisco Systems (CSCO) after the firm reported positive fiscal fourth-quarter results. Cisco’s top line topped quarterly guidance, and its initial guide for 2023 met our expectations. Demand for Cisco’s portfolio remains strong, with double-digit sequential order growth for commercial, enterprise, and public sector customers. Supply remains constrained, but shows signs of easing. We are positive on Cisco’s continued business model transition toward a greater mix of software and a subscription model. Annual recurring revenue continued to grow steadily, and subscription-based products like the Catalyst 9000 family and ThousandEyes performed well. Shares popped 5% following results and guidance that were above Factset consensus, and we now see shares as only modestly undervalued.

Supply constraints continue to dictate Cisco’s results in a robust demand environment. Fiscal fourth-quarter sales of $13.1 billion rose 2% sequentially, but non-GAAP gross margin declined 200 basis points sequentially to 63.3% as Cisco paid broker premiums to source and ship critical components. We credit good cost management for the company’s ability to hit its operating margin and earnings guidance despite missing its gross margin guidance. Supply constraints were broad-based, but we note strong growth from security and applications as bright spots in the quarter.

Management guided to fiscal first-quarter and fiscal-year 2023 results largely in line with our model. Cisco’s guidance implies continued supply constraints, but for constraints and heightened logistics costs to lighten throughout the fiscal year. Management doesn’t expect to grow its backlog in fiscal 2023. Fiscal first-quarter guidance calls for 3% year-over-year growth and year-over-year margin contraction, at the midpoints. Fiscal-2023 guidance for 5% growth at the midpoint reflects strong demand, and non-GAAP EPS guidance of $3.53 implies flat margins to fiscal 2022.

William Kerwin does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.