Cisco Systems, Inc. (CSCO) shares are experiencing a significant surge in pre-market trading on Thursday, following the company’s release of its fourth-quarter earnings report. The report showcased strong financial performance, surpassing analyst expectations for revenue. Cisco reported revenue of $13.64 billion for the quarter, exceeding the consensus estimate of $13.537 billion. This positive result was driven by a robust 14% year-over-year increase in product orders, although this figure drops to 6% when excluding the impact of Splunk, a software company Cisco recently acquired. Despite this positive performance, total revenue declined by 10%, with product revenue decreasing by 15% and services revenue experiencing a 6% increase. Splunk’s contribution to Cisco’s total revenue for the fourth quarter of fiscal 2024 amounted to approximately $960 million.
However, the news wasn’t entirely positive. Cisco revealed its plans to lay off thousands of employees, affecting around 7% of its global workforce, as part of a strategic restructuring. This decision is aimed at reallocating resources and enhancing its focus on key growth areas, particularly cybersecurity, cloud systems, and artificial intelligence (AI). The company expects to incur pre-tax charges of up to $1 billion, primarily in cash, related to severance pay, termination benefits, and other costs associated with these layoffs.
Cisco’s Chief Financial Officer, Scott Herren, clarified that these layoffs are not solely driven by profit maximization. Instead, the company aims to accelerate its transformation towards cybersecurity, cloud, and AI-related products, requiring a realignment of its workforce to support these strategic priorities. This realignment is crucial for Cisco to maintain its competitive edge in the rapidly evolving technology landscape.
Despite the news of layoffs, Cisco’s non-GAAP gross margins showed improvement. Total gross margin reached 67.9%, up from 65.9% a year earlier. Product gross margin also saw an increase, reaching 67.0% from 65.5% in the previous year. Services gross margin also climbed to 70.3%, up from 67.5% a year ago. However, Non-GAAP operating income experienced a 17% decline, settling at $4.4 billion, with the Non-GAAP operating margin standing at 32.5%.
In terms of profitability, Cisco reported adjusted earnings per share of 87 cents, exceeding analyst estimates of 85 cents per share. The positive earnings report, coupled with the company’s strategic shift towards key growth areas, has led to a significant increase in CSCO shares, currently trading 8.16% higher at $49.15 in pre-market trading on Thursday.
