Andy Wang recently appeared on Schwab Network’s The Watch List with Nicole Petallides to discuss Cisco Systems Inc. ahead of its earnings report. As Cisco navigates through a challenging tech landscape, Andy provided analysis on the company’s current position and the broader industry trends impacting its performance.

Cisco’s Challenges in the Current Market

Andy began by highlighting the tough environment Cisco is facing, particularly in a market dominated by the “Mag7” tech giants. While companies like Apple, Microsoft, and Nvidia have enjoyed significant gains, Cisco has struggled, with its stock down nearly 10% year-to-date. In contrast, the S&P 500 and Nasdaq have both risen by about 14% during the same period.

Andy pointed out that Cisco’s struggles are partly due to a general weakness in the networking industry. High interest rates have curtailed capital expenditures across the tech sector, with many firms holding back on significant investments. Customers are prioritizing spending on artificial intelligence (AI) initiatives, leaving traditional networking infrastructure projects on the back burner.

Restructuring and AI Focus

Cisco’s response to these challenges has been a series of restructuring efforts, including laying off an estimated 4,000 employees this year. Andy noted that these layoffs are part of Cisco’s strategy to shift its focus more toward AI, an area that the company believes will drive future growth. Last June at Cisco Live, company management reaffirmed its $1 billion AI orders goal by F2025, as well as its medium term outlook of 4-6% revenue growth, 6-8% EPS growth. This restructuring is crucial for Cisco as it aims to stay competitive in a rapidly evolving tech landscape.

Expectations for the Earnings Report

Ahead of the earnings report, Wall Street analysts had forecasted earnings per share (EPS) of $0.85 on revenue of $13.54 billion, both representing year-over-year declines. Andy emphasized that the key question for investors will be whether Cisco can achieve its $1 billion AI orders goal in F2025 or is that overly aggressive.

Andy also discussed Cisco’s ongoing transition from a hardware-focused company to a more diversified software and security provider. With 54% of its revenues now coming from recurring subscriptions, thanks in part to its $28 billion acquisition of Splunk, Cisco has been steadily improving the quality of its underlying business. This shift toward software and cybersecurity, Andy noted, presents stronger growth opportunities than the company’s traditional networking business.

Post-Earnings Report: Cisco Surprises with Better-than-Expected Results

Following Andy’s appearance on The Watch List, Cisco released its earnings report, which exceeded analysts’ expectations. The company reported adjusted earnings of 87 cents per share, beating the forecasted 85 cents, and revenue of $13.64 billion, slightly above the expected $13.54 billion.

Despite these positive numbers, Cisco announced a significant restructuring plan, including cutting 7% of its global workforce. This move is part of a broader $1 billion initiative aimed at investing in key growth areas and improving operational efficiency. The restructuring will result in substantial pre-tax charges, with the majority expected to impact the current and upcoming fiscal quarters.

Cisco’s revenue, however, continued its downward trajectory, marking its third consecutive quarter of decline and its first full fiscal year drop since 2020. Sales fell by 10% in the fiscal fourth quarter, and the company projected further declines for the upcoming period. Despite these challenges, Cisco’s increased subscription revenue from the Splunk acquisition helped offset some of the losses, showcasing the benefits of its ongoing diversification strategy.

Looking Ahead: The AI Opportunity

Andy’s analysis highlighted that Cisco’s future success hinges on its ability to capitalize on AI and cybersecurity opportunities. Cisco has already committed nearly $200 million to strategic investments in AI startups, and its recently announced billion-dollar AI investment fund is a testament to its commitment to this area.

The company’s research indicates strong demand for AI-enabled predictive network automation and end-to-end visibility tools, which could be crucial growth drivers in the coming years. As Cisco continues to pivot toward these high-growth verticals, investors will be closely watching to see if the company can deliver on its ambitious goals.

What do you think about Cisco's outlook and AI opportunities?