Cisco earnings growth ‘clearly implies an acceleration in the second half’: Analyst

Morningstar Equity Analyst William Kerwin joins Yahoo Finance Live to share his insights into Cisco's earnings and outlook.

Video Transcript

SEANA SMITH: Cisco's shares jumping just about 7% following its fiscal second quarter earnings. The company reporting a beat on both the top and bottom lines. Guidance, though, for revenue, one of the key drivers here for this after hours move here in the stock-- guidance for its third quarter revenue coming in better than expected. Also full-year revenue growth of 9% to 10.5% beating the Street's expectations by a wide margin.

For more on that, we want to bring in William Kerwin, Morningstar Equity Analyst in technology. William, it's great to have you here. So clearly, strong numbers here from Cisco. The guidance looks pretty solid as well. Your first reaction.

WILLIAM KERWIN: Yeah, it's absolutely a story of the better guidance. Results in the fiscal second quarter came in a little above our expectations, a little bit above consensus. But that guidance for the third quarter, especially on the top line, a midpoint of 12% year-over-year growth, that's well ahead of our expectations coming into this release at about 6%.

So it clearly implies an acceleration in the second half. And I would just say stepping back for a second, it really shows that the networking market in general has proven to be a little bit more resilient this year amid a backdrop of some weakening in markets elsewhere. So definitely positive for Cisco.

DAVE BRIGGS: CEO Chuck Robbins saying as part of the release, the modern, highly secure networks we are building serve as the backbone of our customers' technology strategy. This, combined with the success of our ongoing business, transformation, and operational discipline gives me confidence in our future. How might the China reopening story play into their future as well?

WILLIAM KERWIN: It definitely plays a role as one aspect of the overall demand. But when we look at Cisco, we really see it as a diversified story in terms of its end customers, its end markets. We still believe that the core networking business really drives results.

And that's what the CEO was referencing there in that comment. But they also have the cybersecurity business, the collaboration businesses-- though, upon first glance at the press release, it really does look like that core networking business is what drove the beat this quarter and the impressive guidance next quarter. So China is a factor. I wouldn't say it's the primary driver, in our view. But they have a diversified amount of drivers that all look to be going really well for them.

SEANA SMITH: William, supply issues had certainly been a challenge here for Cisco recently. We know a number of shortages for their components had held back their ability to fill all of their orders. In this release, the company saying that they have taken steps to improve supply. What do you think the supply picture currently looks like and how much improvement are you expecting in the coming quarters?

WILLIAM KERWIN: It's definitely something where we're not back to a period where all the supply constraints are alleviated, but it's something that we expect to slowly work its way back to normal throughout calendar 2023 and probably last a little bit longer. So on the prior call, Cisco-- this is the second quarter in a row that Cisco has raised its full-year guidance, so very positive for investors there. But on the previous call, they had talked about expecting a step function each quarter of alleviation of the increased costs related to those supply constraints.

And so it appears that they're sticking to that message. And potentially, it's improving even a little bit faster than they expected just three months ago.

DAVE BRIGGS: We see subscription-- software subscription revenue up 15% year-over-year. And you say it has, essentially, a wide moat, which speaks to their competitive advantage. If there's one thing that really encapsulates that advantage over their competitors, what is it?

WILLIAM KERWIN: For us, it's definitely looking at Cisco's portfolio from a holistic perspective. We like to talk about it as a walled garden sort of approach, where they get into customers serving their core networking hardware needs, but then on top of that, they layer networking software. They can layer cybersecurity software, collaboration.

And it really creates a broad-based value proposition where they embed themselves in various touchpoints to those customers that makes them hard to rip out. So our wide moat rating coming into this quarter is really based around those customer switching costs and just being embedded in mission critical workflows in those enterprise organizations.

SEANA SMITH: All right, William Kerwin Morningstar Equity Analyst, thanks so much for joining us again. Cisco Systems, that stock up just about 6.5%.