Investing Club: Cisco Systems defies the doubters with a beat and raise

Published Wed, Feb 16 20227:38 PM ESTUpdated Wed, Feb 16 20227:41 PM EST

Cisco Systems (CSCO) shares rose nearly 3% in after-hours trading on Wednesday after the tech giant reported a better-than-expected fiscal second quarter. Here are the headline numbers: Revenue increased 6% year-over-year to $12.7 billion, beating estimates on FactSet of $12.664 billion. Adjusted earnings per share was also a beat, growing 6% over a year earlier to $0.84 vs. estimates of $0.81. Despite pressures related to higher commodity and other input costs, Cisco's margin performance was a big positive surprise in the quarter. Adjusted operating margin was 34.3%, above prior guidance of 32.5% to 33.5%. That's an increase from 33.3% in the prior quarter, and stronger than the 33.08% that was expected. Although supply chain costs also remain an issue, Cisco successfully passed through those to offset the hit. During the conference call, management cited a favorable product mix — they shipped higher margin products — as the reason for the quarterly outperformance. Bottom line This was a very good quarter from Cisco, especially considering there had been a growing belief in the market that supply constraints and cost pressures would force the company to lower its full-year outlook. But instead, the company did a fantastic job navigating those challenges to deliver results above expectations and get back in the habit of beat and raise. Investors responded by pushing shares up as much as 5% in extended trading, before settling up 2.75% at around $55.75. Based on the strength of the backlog and orders growth, we think this report could potentially be the start of a rally that gets shares back to its December highs of the low-$60s. The huge RPO and backlog (explained later) give us confidence that this is only the start of a multiyear growth story, and all Cisco needs is an easing of its supply constraints (hopefully in the back half of the year) to meet what one analyst on the earnings call tonight called "the best demand environment across enterprise, carrier, and web-sc