From Nasdaq: 2024-11-13 20:30:12

Cisco Systems reported a strong start to fiscal year 2025 with $13.8 billion in revenue for Q1, exceeding expectations. Non-GAAP EPS of $0.91 was driven by the highest gross margin in over 20 years. Product orders grew 20% year over year, led by enterprise and service provider segments. Security orders doubled, fueled by Splunk’s capabilities. Cisco remains confident in meeting AI infrastructure orders target. Public sector orders were up in EMEA and APJC, despite lower U.S. Federal spending. Cisco sees continued momentum in networking portfolio, data center switching, and security products. Cisco Technologies saw strong demand for their new security products with over 1,000 customers deploying them. Q1 results showed a marquee win for cloud security seats, collaboration product orders growing double digits, and observability orders up high single digits. The global AI partner study anticipates transformative AI technology demand, with Cisco uniquely positioned to capitalize on this opportunity. Cisco’s AI networking opportunity is outlined in three distinct pillars, including AI training infrastructure, AI network connectivity, and AI network inference and enterprise clouds. Cisco’s products are driving hyperscalers to deploy low-power switches for back-end AI training networks and enabling global enterprise customers to modernize their network operations. The company is helping customers prepare for full GenAI adoption with new additions to their data center infrastructure portfolio. Cisco’s AI capabilities are being integrated into their products, providing insights for security and improving customer satisfaction with advanced conversational intelligence. The company continues to enhance its productivity by using AI-enabled automation for faster resolutions and higher customer satisfaction scores. Cisco is uniquely positioned to win with the breadth of its product portfolio and trusted customer relationships. Total revenue for Q1 was $13.8 billion, down 6% year over year. In Q1 of fiscal ’24, Cisco reported non-GAAP net income of $3.7 billion and earnings per share of $0.91, exceeding guidance. Total product revenue was $10.1 billion, down 9%, while service revenue was $3.7 billion, up 6%. Networking was down 23%, security up 100%, and collaboration down 3%. Observability was up 36%, with ARR at $29.9 billion and total subscription revenue at $7.8 billion.

Cisco’s Q1 product orders were up 20% year over year, with the Americas up 17%, EMEA up 26%, and APJC up 25%. Enterprise market orders were up 33%, service provider and cloud up 28%, and public sector up 2%. Total non-GAAP gross margin reached 69.3%, the highest in over 20 years. Product gross margin was 68.9%, and services gross margin was 70.3%.

Cisco ended Q1 with total cash, cash equivalents, and investments of $18.7 billion. Operating cash flow was $3.7 billion, up 54%. The company returned $3.6 billion to shareholders during the quarter through dividends and share repurchases. Cisco also made strategic acquisitions to enhance its security and AI capabilities. Looking ahead, Cisco provided guidance for Q2 and fiscal year ’25, expecting revenue and earnings per share in specified ranges with strong margins and disciplined expense management. Cisco’s service provider business saw growth in telco orders, with cloud orders exceeding $300 million. Margins were strong at 69.3%, the highest in 20 years, driven by favorable product mix and cost reductions. The company expects gross margins to settle at 68-69% for the year. Macro challenges in the U.S. Federal business impacted orders, but global strength was seen in other regions. Cisco reported a strong recovery in enterprise sales. The U.S. Federal delays are not lost deals, just temporary setbacks due to funding issues. Security orders doubled year-over-year, with a focus on Hypershield for advanced data centers. The company crossed 1,000 customers for new security technologies. Analysts anticipate continued innovation and growth in the future.

Web-scale orders were split evenly between AI and traditional front end technologies. Enterprise growth was driven by non-web scale customers. Gross margin impacts included factors like Splunk subscriptions versus term licenses. The majority of web-scale purchases were in the Internet infrastructure sector. Cisco remains optimistic about future performance. In a recent earnings call, executives from a tech company discussed strong performance driven by Internet infrastructure systems and favorable product mix. They also mentioned a one-time benefit from duty drawback project, driving gross margins to 68-69% for the year. Orders for data center switching indicate ongoing enterprise modernization in preparation for AI deployments.

The CEO mentioned that customers are investing in modern infrastructure to prepare for future AI applications, with the majority of build-out still ahead. AI orders are on track to exceed $1 billion, with revenue realization expected in the second half of the year. Revenue timing depends on customer requirements and execution, leading to dynamic revenue projections. Cisco CEO, Chuck Robbins, provided an update on the partnership with NVIDIA, stating that solutions are still in the early stages with plans to ship in 2025. He also mentioned progress with Splunk, adding 1,500 potential customers and hundreds of partners trained on Splunk. CFO, Scott Herren, noted positive integration with Splunk exceeding profitability expectations.

The integration of Cisco and Splunk is progressing well, with joint products launched and organizational functions combined. RPO growth was not broken out due to the blurry line between Cisco and Splunk products. CEO, Chuck Robbins, highlighted strong enterprise networking business, mentioning the release of WiFi 7 platforms and the impact of AI deployment on network modernization. Cisco executives discussed the impact of AI on the company’s growth, with a focus on security and data center modernization. New products like XDR and Secure Access are driving growth in security, while switching infrastructure is key in data center modernization. Customers are engaging with Cisco for AI applications related to customer experience and automation.

Customers are increasingly focusing on AI applications for customer experience and automation, driving the need for data center modernization. Cisco is seeing growth in areas like robotics and supply chain management. The shift towards AI is leading to increased network build-out and data center modernization in private clouds, creating opportunities for Cisco’s infrastructure solutions. Analyst George Notter from Jefferies inquired about the gross margin improvement at the recent Cisco conference call. He asked for more details on the duty drawdown impact in the quarter and whether product mix, such as UCS servers, played a role in the sequential improvement. Executive Vice President, CFO Scott Herren acknowledged the duty drawback benefit in Q1 but did not provide specific details on the impact.

Amit Daryanani from Evercore raised concerns about the 23% decrease in net booking revenues, comparing it to previous quarters with heavy backlog shipments. However, AI and DC switching showed promise. Herren emphasized the importance of AI and DC switching in driving revenue growth. CEO Chuck Robbins expressed equal excitement for Hypershield and Hyperfabric technologies, highlighting their significance in security and AI application deployment for customers.

As Cisco continues to navigate changing demand patterns and supply constraints, analysts seek clarity on revenue growth expectations and product performance. With a focus on AI solutions and networking, the company aims to exceed projections and capitalize on investments in emerging technologies like Hypershield and Hyperfabric. Investors await further updates on Cisco’s strategic direction and financial outlook. In Q1, improved margins were seen due to streamlined processes and favorable product mix. Gross margins are expected to settle between 68%-69% for the full year. Normalized pricing trends are back, with a headwind of 1-2 points, as seen pre-pandemic. Cisco sees AI driving back-end capacity and front-end network demand, with NVIDIA as a competitor in the Ethernet space.

Cisco is investing in the back end for AI training models, driving front-end capacity demand for cloud infrastructure. Enterprise AI deployment will increase front-end network needs. NVIDIA is a competitor but also a partner, with Cisco’s 40 years of experience and vendor diversity positioning them well. Opex is down $90 million, with investments needed for growth into ’25 and ’26.

Cloud hyperscalers are growing orders triple digits, with AI networking hardware demand driven by multiple hyperscalers. Opex is down due to Splunk not being part of the company last year. Cisco is considering areas for accelerated investment to drive growth into the future. Cisco sees opportunity in investing for growth versus passing on excess cost savings for profitability. Cisco reported strong first-quarter results with a focus on investing in AI and security, driven by the addition of Splunk. Four out of six largest customers saw over 100% growth in AI infrastructure. CEO Chuck Robbins highlighted the company’s innovation, strong execution, and focus on AI transformation. The next quarterly call is scheduled for February 12, 2025. For further questions, contact Cisco Investor Relations.



Read more at Nasdaq: Cisco Systems (CSCO) Q1 2025 Earnings Call Transcript