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Cisco Systems (CSCO -2%) is trading slightly lower despite the company reporting nice EPS upside for Q1 (Oct). Revenues fell 5.6% yr/yr to $13.84 bln, but analysts were expecting a larger drop. The Q2 (Jan) guidance was impressive with upside EPS and the mid-point of revenue guidance was above expectations. By geographic segment, revenue from the Americas was down 9%, EMEA down 2%, and APJC up 1%.

• Product revenue was down 9.2% yr/yr to $10.11 bln while Services revenue grew 6% to $3.73 bln. Networking was down 23% as Cisco was lapping an elevated level of shipments last year. However, Cisco did see strong order growth across its Networking products as customers have worked down inventory and deployed the networking products that were shipped to them last year. Security was up 100% yr/yr, but much of that was driven by the Splunk acquisition.
• Its recurring revenue metrics were a bright spot as ARR ended the quarter at $29.9 bln, up 22% with product ARR growth of 42%. Total subscription revenue increased 21% to $7.8 bln, representing 57% of Cisco's total revenue. Total software revenue was up 24% at $5.5 bln, with software subscription revenue up 35%. Cisco is not just a hardware company, it has made strides branching into software subscriptions, which provide recurring revenue streams.
• Building on the growing demand it saw at the end of FY24, product orders grew 20% yr/yr in Q1 and were up 9% organically. This is an acceleration from the 14% product order growth reported last quarter. Cisco sees this as a clear sign of normalizing demand. Enterprise product orders were up 33%, driven by particularly strong performance in the Americas and EMEA across a broad range of customers.
• Cisco saw continued strong momentum in service provider and cloud, with product orders up 28%, driven by triple-digit growth in webscale. Cisco said its AI pipeline continues to be strong. It has earned more design wins and remains confident it will exceed its target of $1 bln of AI orders this fiscal year from webscale customers.
• Its Networking portfolio saw double-digit product order growth overall, driven by switching, wireless and Internet infrastructure. Within data center switching, in particular, Cisco has seen three consecutive quarters of double-digit order growth and an acceleration from Q4 into Q1. Cisco expects this momentum to continue as customers are showing significant interest in its 400-gig and 800-gig switches based on Silicon One.

Overall, this was a very good quarter for Cisco. That was particularly evident in the strong order growth numbers. That tells us customers have finally worked down inventory levels and are ordering more product. It also sounds like its AI-related business is doing well with data center orders on the rise. In terms of the lackluster stock response, we think that is mostly because shares had run nearly 30% since its last earnings report. As such, a good report was likely priced in already and investors want to lock in some profits.