Cisco rises after upbeat forecasts show a recovery in spending

(Bloomberg) — Cisco Systems Inc. Gains nearly 5% in extended trading after delivering strong sales and profit forecasts for the current quarter, suggesting customers are starting to invest in their computer networks again.

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The company said in a statement on Wednesday that sales will range between $13.4 billion and $13.6 billion in the fourth fiscal quarter, which ends in July. This compares to analysts’ average estimate of $13.5 billion. Excluding certain items, profit will be 84 cents to 86 cents per share, versus an expectation of 84 cents.

The outlook had shares rising to $54.11, before paring some gains. It had previously closed at $49.67, down 1.7% for the year.

CEO Chuck Robbins is continuing his push to reshape Cisco as a provider of networking services and software — a strategy that has included the $28 billion acquisition of Splunk Inc. This shift still has not completely insulated the company from fluctuations in device purchases by companies and telecom customers.

Cisco reported a 4% increase in orders last quarter — an indicator of future sales — when including Splunk. Prices were otherwise steady, but analysts feared a decline. Orders decreased by 12% in the previous period.

For the full fiscal year 2024, revenue will range from $53.6 billion to $53.8 billion, compared to an average estimate of $53.6 billion. Sales will grow by a percentage in the low to mid-single digits in fiscal 2025, Cisco said.

“Customers are consuming equipment shipped over the past few quarters in line with our expectations,” Scott Herren, chief financial officer, said in the statement. “We are seeing demand stabilize as a result.”

In a conference call with analysts, Robbins said customers will finish working on their backlog by July.

Cisco’s adjusted gross margin — the percentage of sales remaining after deducting the cost of production — is expected to reach 66.5% to 67.5% during the quarter.

In Cisco’s fiscal third quarter, which ended April 27, revenue shrank 13% to $12.7 billion. Profit was 88 cents per share, minus certain items. Analysts estimated revenue at $12.66 billion and earnings at 82 cents per share.

Cisco noted progress in improving its relationships with large data center operators. These were so-called hyperscalers – companies like Microsoft Corp. and Alphabet Inc.’s Google — pioneered the use of on-premises networking equipment, taking away from Cisco some of its cloud computing spending.

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But Cisco is now benefiting from its spending on AI infrastructure. The company has a “line of sight” of $1 billion in orders from hyperscalers and other companies investing in AI, according to Cisco’s Herren.

Cisco finalized its acquisition of data processing software maker Splunk during the quarter. This addition added $413 million in revenue.

The Splunk acquisition adds to Cisco’s deferred revenue pile, helping it shift from relying on one-time purchases to long-term contracts for software and services. The company now has recurring revenue accounting for more than half of total sales and remaining performance obligations of about $39 billion, according to Herren.

Splunk CEO Gary Steele will become a Cisco president focused on a “go-to-market” strategy. Meanwhile, Jeff Sharets, the company’s chief client and partner officer, will depart in mid-July.

“Steele is known for his operational excellence, and in this new role, he will work closely with Robbins to develop and execute Cisco’s strategic plans and goals,” the San Jose, California-based company said.

(Updates with CFO comments in paragraphs 11 and 12).

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