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Cisco (CSCO +7%) is beginning to break free from the customer-wide inventory digestion headwind that crippled growth during FY24 (Jul), triggering mounting confidence from investors today in the prominent networking component supplier and software developer. As a result, CSCO is bouncing strongly off one-year lows.

• Inventory and economic woes were still prevalent in Q4. CSCO reported adjusted EPS of $0.87, a 24% drop yr/yr, and revs of $13.64 bln, a 10% contraction. However, total product orders expanded by 14%, 8 pts of which stemmed from Splunk, CSCO's $28 bln purchase it closed on in March, a sign that inventory adjustments are mostly over. Demand was balanced across geographies, with product orders up 6% in the Americas and Europe and 8% in Asia. Meanwhile, all customer markets exhibited strength, especially from the public sector.
• Splunk may be a critical differentiator. Like its rival Datadog (DDOG), Splunk is pouncing on outsized demand as security and observability remain crucial in monitoring data sets and pinpointing issues. CSCO closed on Splunk at a favorable time, as DDOG pointed out last week, that the demand environment is showing strength across enterprises and stability from small and medium-sized businesses.
• AI also plays a factor in helping CSCO stand out competitively. The company's Hypershield, an AI-powered security system, is enjoying positive feedback from customers with early access to the product. CSCO has already crossed the $1.0 bln mark in AI orders and expects an additional $1.0 bln in AI product orders in FY25. However, given CSCO's total operations, the AI-related demand is relatively minor.
• CSCO's FY25 guidance underpins sustained upward momentum. The company expects adjusted EPS of $3.52-3.58 and revs of $55.0-56.2 bln, a 3% improvement yr/yr at the midpoint. Also, CSCO announced an approximately 7% cut to its workforce to better streamline operations as part of its broader plan to pivot more resources into the fastest growth areas of its business, particularly AI, cloud, and cybersecurity, all of which are embedded in its FY25 outlook.

CSCO's Q4 report still suffered from a macroeconomic climate that has kept inventories high and prompted increased budget scrutiny. However, the market is placing more weight on CSCO's FY25 guidance and the fact that it exited FY24 with customer demand steady, balanced strength across its portfolio, and enterprise customers finally upgrading their infrastructure in preparation for AI.

The stock is still underperforming many of its peers, including Hewlett Packard Enterprise (HPE) and Ciena (CIEN), both of which report earnings in the coming weeks. More striking has been the disparity between CSCO and Arista Networks (ANET), which is better capitalizing on AI opportunities, aided by its top two customers, Meta Platforms (META) and Microsoft (MSFT). Nevertheless, CSCO is displaying healthy progress, with three of the top four hyperscalers deploying its Ethernet AI fabric. The company is also on track to double its AI product orders in FY25. Following a lengthy period of headwinds, CSCO may finally be turning a corner and is on the cusp of a considerable comeback.