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    Cisco Systems Inc (CSCO)

    Business Description

    Cisco Systems, Inc. designs and sells a broad range of technologies that power the Internet, integrating product portfolios across networking, security, collaboration, applications, and the cloud to create secure, intelligent platforms for digital businesses . The company operates globally, primarily managed through three geographic segments: the Americas, EMEA, and APJC . Cisco's business activities focus on providing comprehensive solutions that integrate networking and security with advanced technologies like AI to support digital transformation for their customers .

    1. Networking - Offers routers, switches, and other infrastructure essential for building and managing networks.
    2. Security - Provides cybersecurity solutions, enhanced by the acquisition of Splunk, to protect digital environments.
    3. Observability - Delivers tools and services for monitoring and analyzing IT infrastructure and applications, bolstered by Splunk's capabilities.
    4. Collaboration - Develops communication and collaboration tools to enhance productivity and connectivity.
    5. Services - Offers a range of support and consulting services to optimize the use of Cisco's products and solutions.

    Q1 2025 Summary

    Initial Price$47.37July 25, 2024
    Final Price$55.74October 25, 2024
    Price Change$8.37
    % Change+17.67%

    What went well

    • Cisco is experiencing strong demand in AI networking, with AI infrastructure orders from web-scale customers exceeding $300 million in Q1 and a strong pipeline expected to surpass their target of $1 billion of AI orders this fiscal year. This underscores Cisco's significant role in back-end AI networks and positions them well for future growth. ,
    • Cisco's new security products, including Hypershield, XDR, Secure Access, and Multicloud Defense, are driving strong organic growth, with over 1,000 customers deploying these new technologies. The first seven-figure Hypershield deal with a large financial institution indicates strong market acceptance and potential for further expansion in the security business. ,
    • Data center modernization is a significant tailwind for Cisco, with strong momentum in data center switching infrastructure. Investments in both security (Hypershield) and AI infrastructure (Hyperfabric) are gaining traction with customers, indicating future growth opportunities and reaffirming confidence in achieving long-term growth targets. , ,

    What went wrong

    • Cisco faces increasing competition from NVIDIA in AI networking, particularly in the Ethernet back-end network side, which could impact Cisco's market share.
    • Organic security orders grew only low to mid-single digits excluding Splunk, indicating weakness in Cisco's core security business; moreover, delays in U.S. federal spending, Cisco's largest customer, have negatively impacted security orders.
    • Revenue realization from AI orders is uncertain and dependent on factors outside Cisco's control, with the majority of AI-related revenue expected in the second half of the year, posing risks to near-term growth.

    Q&A Summary

    1. AI Orders and Revenue Outlook
      Q: Will AI orders lead to higher revenue this year?
      A: AI orders exceeded $300 million, putting us on track to surpass $1 billion this year. Revenue from these orders will mainly contribute in the second half of the year. This growth is balanced across multiple cloud customers, not just one.

    2. Gross Margin Improvement and Sustainability
      Q: What drove strong gross margins and can they be sustained?
      A: Gross margins reached 69.3%, the highest in 20 years. This was driven by the addition of Splunk, favorable product mix, and productivity enhancements. A one-time benefit from duty drawback added about 0.5 to 1 point. We expect gross margins to settle into the 68% to 69% range for the full year.

    3. Cloud Orders and Growth Drivers
      Q: What's driving massive growth in cloud orders?
      A: Cloud orders grew over 100%, with four of the six largest cloud providers each exceeding 100% growth. Growth is driven by routing, switching, and optical products, including AI infrastructure underpinning GPUs and backend networks.

    4. Security Growth and Hypershield Adoption
      Q: What's driving strong security growth and Hypershield adoption?
      A: Security orders grew in the mid to high teens excluding U.S. Federal. Over 1,000 customers have deployed new technologies like XDR, Secure Access, and Multicloud Defense. A large financial institution became the first seven-figure Hypershield customer, signaling positive market reception.

    5. Data Center Modernization and Switch Demand
      Q: How is data center switching demand evolving with AI?
      A: Customers are modernizing data centers to prepare for AI deployments. The third consecutive quarter of strong order growth in data center switching reflects this trend. The majority of build-out is still ahead on the enterprise side.

    6. Macro Impact and U.S. Federal Delays
      Q: How are macro factors and federal delays impacting business?
      A: U.S. Federal orders were impacted by continuing resolution pressures and the fiscal responsibility act, causing delays but not lost deals. Excluding U.S. Federal, product orders were up mid to high teens. No significant impact was observed from the U.S. elections.

    7. NVIDIA Partnership and Competitive Positioning
      Q: How is the NVIDIA partnership progressing and affecting AI plans?
      A: The NVIDIA partnership is still early; solutions like Hyperfabric will ship in early 2025. We announced AI compute platforms based on NVIDIA GPUs. Despite competition, our experience in Ethernet and our own silicon provide a competitive edge.

    8. Splunk Integration and Growth Opportunities
      Q: How is the Splunk integration progressing?
      A: Splunk integration is progressing well, with hundreds of partners trained and about 1,500 more customers added to the pipeline. Splunk is tracking ahead of expectations on profitability.

    9. Enterprise Refresh and WiFi 7
      Q: How significant is the enterprise refresh opportunity with WiFi 7?
      A: Enterprise networking performed strongly, with customers upgrading to prepare for AI. New WiFi 7 platforms offer hardware portability between on-premises and cloud management.

    10. OpEx Management and Investment Priorities
      Q: How is OpEx being managed and which areas are prioritized?
      A: OpEx growth is driven by the addition of Splunk. Savings from efficiencies are being reinvested into AI and security, the fastest-growing parts of our business.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Charles H. RobbinsChair and Chief Executive OfficerJuly 2015Charles H. Robbins has served as CEO since July 2015, as a member of the Board since May 2015, and as Chair of the Board since December 2017. He joined Cisco in December 1997 and has held various managerial positions, leading Cisco's global sales and partner teams. Robbins is also a board member of BlackRock, Inc. since 2017 .
    R. Scott HerrenExecutive Vice President and Chief Financial OfficerDecember 2020R. Scott Herren joined Cisco in December 2020. Before Cisco, he was the CFO of Autodesk, Inc. from November 2014 and held leadership roles at Citrix Systems, Inc. He has over 15 years of experience in senior strategy and financial positions at FedEx Corporation and IBM. Herren is a board member of Rubrik, Inc. since 2021 .
    Gary SteelePresident, Go-to-MarketMay 2024Gary Steele joined Cisco in March 2024 as EVP and GM, Splunk, after Cisco's acquisition of Splunk. He was promoted to his current role in May 2024. Previously, he was the President and CEO of Splunk and CEO of Proofpoint, Inc. Steele has held roles at Sun Microsystems, Inc. and Hewlett-Packard Company. He is a board member of Upwork Inc. since 2018 .
    Deborah L. StahlkopfExecutive Vice President and Chief Legal OfficerAugust 2021Deborah L. Stahlkopf joined Cisco in August 2021. She spent 14 years at Microsoft, holding roles such as Corporate Vice President, General Counsel, and Corporate Secretary. Before Microsoft, she practiced law at Perkins Coie LLP and Cooley Godward LLP. Stahlkopf is a board member of NextEra Energy, Inc. since 2023 .
    Thimaya SubaiyaExecutive Vice President of OperationsMarch 2024Thimaya Subaiya joined Cisco in July 2018 and was promoted to EVP of Operations in March 2024. He previously served as SVP, Chief Transformation Officer, and SVP and GM, Customer Experience. Before Cisco, he spent eight years at Salesforce, Inc., and held leadership roles at Oracle Corporation .

    Questions to Ask Management

    1. Given that networking revenue declined by 23% this quarter compared to the same period last year, and acknowledging the previous backlog shipments' impact, what specific strategies are you implementing to drive sequential growth in your networking segment for the rest of fiscal 2025?

    2. With customers preparing for AI but only 13% of organizations reporting that their infrastructure is ready, how confident are you that the expected increase in front-end capacity demand will occur in the near term, and what factors could potentially delay this anticipated growth?

    3. Security orders, excluding the U.S. Federal impact, grew in the mid- to high teens driven by new products like XDR and Secure Access, but given that Hypershield is not yet a major contributor to orders, how sustainable is this growth rate without significant adoption of your newer offerings?

    4. As you continue integrating Splunk, can you elaborate on the challenges you may face in realizing the expected synergies, and how this integration will drive sustained growth in your security business amidst fierce competition?

    5. Considering the recent fluctuations in product orders due to inventory digestion and normalizing demand, what specific factors give you confidence in achieving your long-term target of 4% to 6% growth, and are there any near-term headwinds that could jeopardize this goal?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateSeptember 2001
    End Date/DurationNo termination date
    Total additional amountN/A
    Remaining authorization amount$3.2 billion
    DetailsOngoing program with no specified additional amounts recently authorized

    Past Guidance

    Q1 2025 Earnings Call

    • Issued Period: Q1 2025
    • Guided Period: Q2 2025 and FY 2025

    Guidance for Q2 2025:

    • Revenue: $13.75 billion to $13.95 billion
    • Non-GAAP Gross Margins: 68% to 69%
    • Non-GAAP Operating Margin: 33.5% to 34.5%
    • Non-GAAP Earnings Per Share (EPS): $0.89 to $0.91
    • Non-GAAP Effective Tax Rate: Approximately 19%

    Guidance for FY 2025:

    • Revenue: $55.3 billion to $56.3 billion
    • Non-GAAP Earnings Per Share (EPS): $3.60 to $3.66
    • Non-GAAP Effective Tax Rate: Approximately 19% .

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: Q1 2025 and FY 2025

    Guidance for Q1 2025:

    • Revenue: $13.65 billion to $13.85 billion
    • Non-GAAP Gross Margin: 67% to 68%
    • Non-GAAP Operating Margin: 32% to 33%
    • Non-GAAP Earnings Per Share (EPS): $0.86 to $0.88
    • Non-GAAP Effective Tax Rate: Approximately 19%

    Guidance for FY 2025:

    • Revenue: $55 billion to $56.2 billion
    • Non-GAAP Earnings Per Share (EPS): $3.52 to $3.58
    • Non-GAAP Effective Tax Rate: Approximately 19% .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2025

    Guidance for Q4 2024:

    • Revenue: $13.4 billion to $13.6 billion
    • Non-GAAP Gross Margin: 66.5% to 67.5%
    • Non-GAAP Operating Margin: 31.5% to 32.5%
    • Non-GAAP Earnings Per Share (EPS): $0.84 to $0.86
    • Revenue from Splunk: $950 million to $1 billion
    • Non-GAAP EPS Impact from Splunk: Negative $0.03 due to interest impact
    • Non-GAAP Effective Tax Rate: Approximately 18%

    Guidance for FY 2025:

    • Revenue Growth: Low to mid-single-digit range
    • Interest Impact from Splunk Acquisition: Headwind of approximately $350 million per quarter
    • Operating Margins: Expected to be in line with Q4 2024 guidance .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024

    Guidance for Q3 2024:

    • Revenue: $12.1 billion to $12.3 billion
    • Non-GAAP Gross Margin: 66% to 67%
    • Non-GAAP Operating Margin: 33.5% to 34.5%
    • Non-GAAP Earnings Per Share (EPS): $0.84 to $0.86

    Guidance for FY 2024:

    • Revenue: $51.5 billion to $52.5 billion
    • Non-GAAP Earnings Per Share (EPS): $3.68 to $3.74
    • Non-GAAP Effective Tax Rate: 19% .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Amazon Web Services LLC
    • Arista Networks, Inc.
    • Broadcom Inc.
    • Ciena Corporation
    • CrowdStrike Holdings, Inc.
    • Datadog Inc.
    • Dell Technologies Inc.
    • Dynatrace Inc.
    • Fortinet, Inc.
    • Hewlett-Packard Enterprise Company
    • Huawei Technologies Co., Ltd.
    • Juniper Networks, Inc.
    • Microsoft Corporation
    • New Relic, Inc.
    • Nokia Corporation
    • Nvidia Corporation
    • Palo Alto Networks, Inc.
    • RingCentral, Inc.
    • Zoom Video Communications, Inc.
    • Zscaler, Inc.