Cisco deserves more love from investors as management lifts its full-year guidance

Published Wed, Nov 16 20227:41 PM ESTUpdated Wed, Nov 16 20229:06 PM EST

Cisco Systems (CSCO) reported quarterly results on Wednesday that beat on the top and bottom lines. Even better: Management delivered a strong rebuttal to the bear case against the computer network equipment company. Revenue for the fiscal first quarter increased 6% year over year to $13.6 billion, beating estimates of $13.31 billion, according to Refinitiv. Adjusted quarterly earnings grew 5% year over year to 86 cents per share, beating estimates of $0.84, according to Refinitiv. Adjusted gross margin declined to 63.0%, slightly below estimates of 63.5%. Cisco's adjusted operating margin was 31.8%, slightly below estimates of 32.1%. Bottom line We are pleased to see Cisco deliver a clean top and bottom line beat, including the greatest revenue growth in the company's history. It was also great news to see management raise its outlook for its full year, signaling confidence in the company's massive backlog (future revenue from orders received but not filled). With investor expectations low into the print, we think Cisco shares are deserving of the 4% pop we are seeing in after-hours trading. The bear case against the stock is that Cisco is essentially living off its backlog right now and as orders fall, the company will struggle to grow once the backlog converts to revenue. That's not the story we are hearing tonight, and we think it could be a false narrative if Cisco's business proves to be more resilient than what the market gives it credit for. Sure, orders are down year over year, but this is more the result of tough comparisons than a weak demand environment. It's hard to predict where orders will land as the economy softens, but management believes it will still end the year with a backlog of 2 times to 3 times its historical level if orders fall 10% this year — and that's not a forecast. When you combine Cisco's massive backlog with software and subscription software becoming a larger part of the pie, we think it is easy to see why management is confident about its future. Guidance It was nice to see Cisco raise its full year revenue forecast of 4% to 6% growth year over year to 4.5% to 6.5%. This new view implies full year sales of $54.392 billion, which is higher than estimates of $54.144 billion and passes through this quarter's beat and reflects no change in how management is viewing the second half of the year. Management also increased its earnings outlook for the full year, raising its range to $3.51 to $3.58 from $3.49 to $3.56. This new midpoint of $3.55