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Is Cisco’s Growth Real or Just Well-Timed AI Hype?
Strong Q3 FY2025 performance driven by unexpected AI infrastructure demand and broad product growth; scrutinizing sustainability.
By The Numbers
- Revenue: $14.1 billion, up 11% YoY
- Non-GAAP EPS: $0.96, up 9% YoY
- Product Revenue: up 15% YoY
- AI Infrastructure orders from webscale: exceeded $600 million
- Remaining Performance Obligations (RPO): $41.7 billion, up 7% YoY
Key Highlights
- Exceeded revenue and EPS guidance for the quarter.
- Product order growth was significant, even excluding the Splunk acquisition.
- AI infrastructure orders reached a key target ahead of projections.
- Security and Observability portfolios showed substantial revenue increases.
- Strong operational cash flow generation continued.
- Returned significant capital to shareholders through buybacks and dividends.
The News
Cisco announced robust third-quarter fiscal year 2025 results, reporting revenue of $14.1 billion, an 11% increase from the prior year. Profitability metrics, including GAAP and non-GAAP earnings per share, were above the high end of the company's guidance. The results were notably bolstered by strong product orders, including significant contributions from AI infrastructure solutions for webscale customers. For more information about Cisco’s Q3 FY2025, click here.
Analyst Take
Our perspective on Cisco's Q3 FY2025 results is one of cautious optimism. The headline numbers are undoubtedly strong, with revenue and earnings exceeding the company's own guidance. This speaks to solid execution in the quarter. The reported 11% revenue growth, while impressive, is significantly influenced by the strong product order growth of 20%, or 9% excluding the Splunk contribution. This tells us that underlying demand for Cisco's core and newer offerings is robust.
The AI infrastructure orders from webscale customers exceeding the $1 billion target a quarter ahead of schedule are a clear bright spot. It highlights Cisco's critical position in providing the secure networking backbone required for the massive scale-out of AI compute. This trend is not just a cyclical uptick; it points to a foundational shift in infrastructure requirements that plays directly into Cisco's strengths. The question becomes, how sustainable is this level of acceleration? While the demand is real, the lumpiness of large webscale orders can introduce volatility in future quarters.
Beyond AI, the performance of the Security and Observability portfolios is particularly encouraging. Security's 54% revenue growth is substantial and reflects the increasing importance organizations place on comprehensive security solutions in a distributed and threat-rich environment. Observability's 24% growth indicates success in their strategy to provide better visibility and management across complex IT environments. These areas represent strategic growth vectors for Cisco beyond their traditional networking business and validates the Chuck Robbins pivot toward Cisco becoming more of a pure play software company.
Networking's continued growth at 8% demonstrates the enduring demand for their core switching and routing products. While not growing at the explosive rates of Security or AI infrastructure, it remains the bedrock of their business and a critical component of virtually all IT infrastructure build-outs, including those for AI.
The increase in RPO, particularly the 10% growth in product RPO, provides a degree of visibility into future revenue streams. It suggests that customers are committing to larger, longer-term deals, which is a positive indicator of confidence in Cisco's offerings.
The slight decrease in cash and investments on the balance sheet is not a major concern given the significant amount returned to shareholders and investments made, including the SnapAttack acquisition. The continued strong operating cash flow generation provides ample flexibility for future investments and shareholder returns.
Financial Highlights
Cisco's third quarter of fiscal year 2025 saw total revenue climb to $14.1 billion, an 11% increase compared to $12.7 billion in the third quarter of fiscal year 2024. This growth was largely propelled by a 15% surge in product revenue to $10.4 billion, while services revenue saw a more modest 3% increase to $3.8 billion.
From a GAAP perspective, net income rose 32% to $2.5 billion, resulting in diluted earnings per share of $0.62, a 35% jump year over year. Non-GAAP net income also improved, increasing 8% to $3.8 billion, with non-GAAP diluted earnings per share at $0.96, up 9%. The reconciliation between GAAP and non-GAAP results highlights adjustments for items such as share-based compensation expense, amortization of acquisition-related intangible assets, and acquisition/divestiture-related costs.
Breaking down product revenue by category provides further insight. Security revenue experienced a substantial 54% year-over-year increase, reaching over $2 billion. Observability also showed strong momentum with 24% growth. Networking, the largest segment, grew a solid 8% to over $7 billion. Collaboration revenue saw a more moderate 4% increase. Geographically, all segments contributed positively, with Americas up 14%, EMEA up 8%, and APJC up 9%.
Gross margins remained healthy. On a GAAP basis, total gross margin was 65.6%, with product gross margin at 64.4% and services gross margin at 68.7%. Non-GAAP gross margin was 68.6% in total. Operating expenses on a GAAP basis were flat year over year at $6.1 billion, representing 42.9% of revenue. Non-GAAP operating expenses increased 12% to $4.8 billion, or 34.1% of revenue.
The balance sheet shows a decrease in cash, cash equivalents, and investments from $17.9 billion at the end of fiscal 2024 to $15.6 billion at the end of Q3 FY2025. Remaining Performance Obligations (RPO) stood at $41.7 billion, a 7% increase, with 51% expected to be recognized as revenue in the next 12 months. Product RPO growth of 10% outpaced the 5% growth in services RPO. Deferred revenue was up 2% to $28.0 billion.
What was Announced
Our initial read of Cisco's third-quarter fiscal year 2025 results is largely positive, frankly. Seeing them exceed their guidance for both the top and bottom line is always a good sign of solid execution. Revenue hitting $14.1 billion, an 11% jump year over year, and non-GAAP EPS at $0.96, up 9%, demonstrate a healthy business performing well in a dynamic market. It tells us that, despite potential headwinds, there's real demand for what Cisco is putting out there right now.
What particularly stands out to us from these numbers is the performance in key strategic areas. The surge in product orders, notably the AI infrastructure business with webscale customers exceeding its target early, is a clear indicator of where significant investment is happening and Cisco's crucial role in it. We also have to highlight the impressive growth in Security and Observability revenues; it reinforces our belief that these segments are vital for modern IT and that Cisco's investments there are paying off, expanding their relevance beyond traditional networking.
Looking Ahead
Based on what HyperFRAME is observing, Cisco is clearly benefiting from the surge in demand for AI-related infrastructure. The key trend that we are going to be tracking is the ability of Cisco to translate this initial AI infrastructure momentum into sustained, broader growth across their portfolio as enterprises move beyond initial AI build-outs to integrate AI throughout their operations.
The pivot by Chuck Robbins to position Cisco as a more software focused vendor is also starting to bear fruit. We are seeing strong execution and product alignment in the observability space. With Cisco Live and Splunk’s .Conf conferences coming in the next few months we expect to see a further round of announcements and clarity on the integration efforts. With this further clarity we will reserve further perspective on the software pivot, but early indications and the timeline for announcements leaves us bullish.
Based on our analysis of the market, our perspective is that the networking requirements for AI are so fundamental and extensive that Cisco is uniquely positioned to capture significant value over the long term. Going forward, we are going to be looking for how the company performs on integrating Splunk and leveraging its capabilities to drive growth in their software and services revenue, which lagged product growth this quarter. When you look at the market as a whole, the announcement today underscores the increasing convergence of networking, security, and AI in driving digital transformation. HyperFRAME will be closely monitoring how the company does in demonstrating continued profitable growth and strategic execution in future quarters.
Harvy James Espellarga | Analyst In Residence - FinOps and Earnings Coverage
Harvy James Espellarga is a financial analyst with a proven track record of analysing the financial performance of tech companies. He brings a deep understanding of accountancy principles and specializes in FinOps, helping organizations optimize their cloud spending and maximize ROI. His insightful analyses have been featured in publications like Seeking Alpha, where he provides expert commentary on performance and operational strategies for tech companies. He also previously contributed to cutting-edge research on emerging industry trends at The Futurum Group, supporting leading research directors.
Steven Dickens | CEO HyperFRAME Research
Regarded as a luminary at the intersection of technology and business transformation, Steven Dickens is the CEO and Principal Analyst at HyperFRAME Research.
Ranked consistently among the Top 10 Analysts by AR Insights and a contributor to Forbes, Steven's expert perspectives are sought after by tier one media outlets such as The Wall Street Journal and CNBC, and he is a regular on TV networks including the Schwab Network and Bloomberg.