Q1 2025 Summary
Published Feb 7, 2025, 7:58 PM UTC- 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. , ,
- 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.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | -6% | The drop was driven by a -9% decline in product revenue, partially offset by a +6% increase in services. Customers took longer to implement previously elevated product shipments, and macroeconomic factors impacted IT spending (e.g., delayed U.S. Federal spending). Excluding the Splunk contribution, total revenue would have declined -14%. |
Networking | -23% | The steep decline reflects normalizing demand after earlier high shipments and continued scrutiny of spending by customers. Key product lines like campus and data center switching, along with WiFi-6 and Meraki, were still under pressure following their declines in FY 2024. |
Security | +100% | The surge was largely driven by the Splunk acquisition, which boosted products like XDR and SIEM offerings. Even excluding Splunk, Security still saw modest growth due to strong demand for integrated platform solutions and the shift toward a unified security approach. |
Observability | +36% | Growth came from the Observability Suite, with Splunk’s technologies (e.g., Splunk Observability, AppDynamics) adding end-to-end visibility capabilities. Excluding Splunk, Observability grew by +1%, indicating existing solutions like ThousandEyes also contributed but at a lower rate. |
Product Revenue | -9% | Customers’ delayed spending and the normalization of previously high shipment volumes drove this decline. Despite gains in Security and Observability (both aided by Splunk), the -23% fall in Networking revenue significantly pulled down overall product sales. |
Services | +6% | Higher demand for solution support, software support, and advisory services, plus Splunk-related service contributions, fueled this increase. These recurring revenue streams proved more resilient in a cautious spending environment. |
Americas | -8% | Delayed U.S. Federal spending and continued macro uncertainty weighed on large enterprise and public sector deals. Product revenue in the region fell by -12%, reflecting less demand from enterprise, service provider, and cloud customers following prior elevated shipments. |
Operating Income (EBIT) | -45% | Lower revenue combined with higher operating expenses (including restructuring charges, greater amortization from Splunk’s intangibles, and increased R&D costs) significantly compressed EBIT margins. Gross margin improvements were not sufficient to offset these higher costs. |
Net Income | -25% | Net income was impacted by the overall revenue decline, increased operating costs, and interest expenses tied to the Splunk acquisition. Although there was a one-time tax benefit, year-over-year profitability still dropped sharply due to higher amortization and restructuring charges. |
EPS (Diluted) | -24% | Reflecting the lower net income, EPS fell despite share buybacks and the tax benefit. Continued acquisition-related expenses and a challenging revenue environment outweighed any margin gains, resulting in a significant decline in diluted EPS. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q2 2025 | no prior guidance | $13.75B to $13.95B | no prior guidance |
Non-GAAP Gross Margins | Q2 2025 | no prior guidance | 68% to 69% | no prior guidance |
Non-GAAP Operating Margin | Q2 2025 | no prior guidance | 33.5% to 34.5% | no prior guidance |
Non-GAAP EPS | Q2 2025 | no prior guidance | $0.89 to $0.91 | no prior guidance |
Non-GAAP Effective Tax Rate | Q2 2025 | no prior guidance | 19% | no prior guidance |
Revenue | FY 2025 | $55B to $56.2B | $55.3B to $56.3B | raised |
Non-GAAP EPS | FY 2025 | $3.52 to $3.58 | $3.60 to $3.66 | raised |
Non-GAAP Effective Tax Rate | FY 2025 | 19% | 19% | no change |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q1 2025 | $13.65B to $13.85B | $13.841B | Met |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
AI Infrastructure and Large-Scale Deals | Discussed strong AI momentum: • Q4 2024: Passed $1B in AI orders with top hyperscalers. • Q3 2024: Targeting $1B in AI product orders for FY25. • Q2 2024: Pipeline grew to 3x the $1B in AI orders. | Orders exceeded $300M; on track to surpass $1B in AI orders; first 7-figure Hypershield deal signed. | Consistently highlighted; sentiment remains bullish with growing web-scale and enterprise AI investments. |
Cloud and Webscale Growth | Mixed performance previously: • Q4 2024: Cloud orders +2%, web-scale double-digit. • Q3 2024: Service provider/cloud up 10% , web-scale stabilizing. • Q2 2024: Cloud orders down 40% amid inventory digestion. | Cloud and service provider orders +22% (excluding Splunk), with triple-digit growth in web-scale. Less than half attributed to AI; rest from traditional cloud. | Improving after inventory challenges; web-scale returning with triple-digit growth. |
Security Portfolio and Splunk Acquisition | Previously strong but accelerating with Splunk: • Q4 2024: Security revenue +81% with Splunk; Hypershield introduced. • Q3 2024: +36% security revenue (Splunk included), Cisco Hypershield launched. • Q2 2024: Pending Splunk acquisition, security +3%. | Security revenue +100% (including Splunk); new XDR, Secure Access, and 7-figure Hypershield deal ; Splunk integration progressing well. | Building momentum; Splunk driving higher security growth and product integration. |
Software and Recurring Revenue Model | Steady shift to subscriptions: • Q4 2024: Software revenue +15%, 92% subscription-based. • Q3 2024: Sub revenue +12%, software revenue +5%. • Q2 2024: Flat software revenue but 88% subscription. | Subscription revenue +21% to $7.8B, software revenue +24% to $5.5B, ARR at $29.9B. | Ongoing transition to recurring revenue; software now a significant contributor. |
Inventory Digestion and Backlog Normalization | Focus in prior calls: • Q4 2024: Digestion largely done, difficult YoY comp from backlog clearance. • Q3 2024: Nearing completion by FY-end. • Q2 2024: Elevated stock at customers, backlog back to normal. | Now mostly normalized; 6% YoY revenue decline partly due to prior-year backlog shipments; sequential orders improving. | Stabilizing; no longer a major overhang on revenue. |
Revenue Guidance and Growth Outlook | Similar caution with backlog comps: • Q4 2024: FY25 rev $55B–$56.2B ; tough compare vs. backlog shipments. • Q3 2024: FY24 rev $53.6B–$53.8B, FY25 low/mid single-digits. • Q2 2024: FY24 rev $51.5B–$52.5B, cautious near term. | Q2 2025 rev $13.75B–$13.95B, FY25 rev $55.3B–$56.3B; confident in AI and security as growth drivers. | Steady guidance despite tough backlog comps; AI and security seen as long-term growth levers. |
Federal Spending and Government Orders | Mentioned previously with varying strength: • Q4 2024: Public sector +20% globally. • Q3 2024: Temporary U.S. federal impact but resolved. • Q2 2024: No mention. | Impacted by continuing resolutions; delays rather than lost deals; public sector up 2% overall, but U.S. federal lower YoY. | Mixed; short-term U.S. federal delays, but expected to rebound once funding issues settle. |
Duty Drawback Tariffs Impact on Margins | • Q4 2024, Q3 2024, Q2 2024: No mention. | One-time 0.5–1 pt margin benefit from duty drawback; not repeatable. | Newly introduced; minor but non-recurring margin lift. |
WiFi 7 Network Modernization | • Q4 2024, Q3 2024, Q2 2024: No mention. | Announced high-end WiFi 7, operates on-prem or cloud with same hardware; sees AI-driven front-end network refresh. | New topic; potential long-term enterprise upgrade cycle. |
Restructuring Plan and Workforce Reallocation | Previous discussions of resource shifts: • Q4 2024: ~7% workforce impact, $1B charges. • Q3 2024: No mention. • Q2 2024: ~5% workforce impact, $800M charges. | ~10% workforce realignment mostly done; focused on AI and security; not purely cost-driven. | Ongoing reallocation to high-growth areas (AI, security). |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.