Networking giant Cisco Systems Inc. delivered a solid third-quarter earnings and revenue beat even as its overall sales fell substantially from the same period one year earlier.

It also bumped up its revenue guidance for the fiscal year ending in July, saying customers have almost worked through the inventory glut that was blamed for its shortfalls in the past couple of quarters. Investors appeared to like what they saw, as Cisco’s stock rose more than 4% in extended trading, adding to a small gain earlier during the regular trading session.

The company reported earnings before certain costs such as stock compensation of 88 cents per share, handily beating the analysts’ consensus estimate of 83 cents per share. Revenue for the period dropped 13% from a year earlier, to $12.7 billion, in its biggest slide since 2009, but still came in ahead of the analysts’ forecast of $12.53 billion.

The drop in revenue had a big impact on Cisco’s profitability. The company reported net income of $1.89 billion, down from $3.21 billion in the same period one year ago.

On a conference call with analysts, Cisco Chief Executive Chuck Robbins (pictured) said the company’s core internet and corporate networking business appears to have turned a corner and is now progressing toward normalization. He added that customers will likely finish installing most of the inventory backlog accumulated over the last year or so by the time the company’s fiscal year wraps up in July. That came after Cisco admitted last year that sales were still being hampered by customers struggling to digest past purchases, resulting in lower demand.

“We currently expect customers to complete the installation of the majority of their inventory by the end of our fiscal year in July,” Robbins told analysts, adding that he was extremely happy to see the end of supply chain challenges that have held the company back for almost two years.

Third Bridge analyst Joe Brunetto said Robbins’ comments appeared to have been a pleasant surprise for investors who were worried about the possibility of customer inventory backlogs dragging on into the new fiscal year. “Investor sentiment was negative going into the print due to macro uncertainty and weakness in Campus and Service Provider segments,” he said.

Breaking down the numbers, Cisco said its product revenue came to $9.02 billion, ahead of the Street’s forecast of $8.95 billion. Services revenue topped $3.68 billion versus the $3.58 billion expected.

“The strength of our core business continues to produce strong cash flows, reinforcing our ongoing commitment to delivering consistent capital returns,” Robbins added.

Cisco finally completed its $28 billion acquisition of the security and observability software company Splunk Inc. during the quarter. The deal hurt the company’s earnings per share but boosted revenue to the tune of an additional $413 million, Robbins said.

“Upon closing the deal, we identified 5,000 existing Cisco customers who have the potential to become meaningful Splunk customers, and our sales teams are already making those connections,” the CEO told investors.

Splunk CEO Gary Steele is set to become Cisco’s president of go-to-market and will continue to oversee the security firm’s day-to-day operations, said Cisco Chief Financial Officer Scott Herren.

The appointment of Steele could be key to Cisco’s longer-term growth aspirations, said Constellation Research Inc. analyst Holger Mueller. He pointed out that Robbins is aiming to make up for the company’s shrinking networking revenues with growth in security and observability, and the acquisition of Splunk is key to that plan.

“With all regions shrinking in the last quarter, this is going to be a tough three or four quarters ahead for Cisco, although investors will appreciate that the company’s subscription revenue is now stable, accounting for 54% of the total,” he said. “The question is whether or not Cisco can find a way to grow from security, observability, cloud and AI. So far it has not, but Steele in his new go-to-market role may well be the key that unlocks this challenge.”

Looking at the current quarter, Cisco said it sees revenue of between $13.4 billion and $13.6 billion, with earnings of between 84 and 86 cents per share.

More interesting for investors, perhaps, is that Cisco upped its fiscal 2024 revenue forecast to a range of $53.6 billion to $53.8 billion, from an earlier range of $51.5 billion to $52.5 billion. That lifts the company’s forecast above Wall Street’s projection of $53.14 million in annual sales.

Longer-term, Robbins said, Cisco has high hopes that it can capitalize on a multibillion-dollar AI infrastructure opportunity. He pointed out to analysts on the call that enterprises need to build a stronger networking backbone to cater to the new AI workloads they’re racing to integrate. As such, the company has “confidence in our line of sight to $1 billion of AI product orders in fiscal 2025,” he said.

Brunetto shared Robbins’ optimism about Cisco’s AI prospects, saying that the company’s recently announced partnership with Nvidia Corp. may give the company an edge over its rivals in this area. “In terms of Cisco’s AI exposure, we believe it to be well-positioned versus its peers,” Brunetto said. “Our experts still think the pending HPE/Juniper merger is important to pay attention to, as we wait to see what the combined companies can do with their Mist and Aruba products.”

Cisco’s stock was down about 2% in the year to date prior to today’s report, compared with an 11% gain for the broader S&P 500 Index.

Photo: Fortune GLOBAL FORUM/Flickr