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    Cisco Systems Inc (CSCO)

    Q2 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$53.11October 25, 2023
    Final Price$52.33January 25, 2024
    Price Change$-0.78
    % Change-1.47%

    What went well

    • Strong growth in software and recurring revenue streams: Cisco is experiencing growth in software subscriptions, particularly in Security, Collaboration, and Observability, with software subscription renewal rates responding positively. New security innovations like XDR and Secure Access are gaining traction, with over 230 customers on the XDR platform since its launch. This shift towards software and recurring revenue enhances Cisco's long-term growth prospects. ,
    • Strategic partnership with NVIDIA in AI infrastructure: Cisco's partnership with NVIDIA positions it as a key player in the AI infrastructure market. The combined solutions will utilize Cisco Ethernet technology alongside NVIDIA GPUs, sold through Cisco's extensive channel network. This collaboration opens new avenues for growth in the AI and enterprise markets. , ,
    • Gaining market share in key markets: Cisco has gained market share in its four largest markets, including campus switching, wireless, and service provider routing, indicating a strong competitive position. Despite market challenges, Cisco's core businesses are performing well relative to competitors.

    What went wrong

    • Cisco has lowered its revenue guidance for the full fiscal year by 500 basis points due to macroeconomic uncertainty, customers absorbing high levels of inventory, and ongoing weakness in the service provider market.
    • The inventory digestion issue is extending longer than expected, with cloud providers having over 20 weeks of inventory; this is expected to impact sales through the end of fiscal year 2024.
    • Revenue levels have returned to fiscal 2019 levels, raising concerns about Cisco's ability to achieve its long-term growth targets of 5% to 7%; there are questions about potential market share loss in core networking, although Cisco disputes this.

    Q&A Summary

    1. Lower Revenue Guidance and Macro Impact
      Q: What's behind the lower revenue guidance and macro impact?
      A: Management cited a 500 basis point reduction in revenue guidance due to macro uncertainty, with customers extending digestion periods and pushing out orders. They expect elevated inventory levels to be resolved by fiscal year-end but note that macro factors and service provider weakness may persist.

    2. AI Opportunities and NVIDIA Partnership
      Q: How will the NVIDIA partnership impact Cisco's AI strategy?
      A: The NVIDIA partnership focuses on integrating Cisco's Ethernet technology with NVIDIA's GPUs in AI clusters. Management emphasized that the collaboration includes Ethernet networking and servers, enhancing Cisco's position in AI infrastructures.

    3. Inventory Digestion and Revenue Trajectory
      Q: When will inventory digestion issues resolve?
      A: Management expects the consumption of elevated inventory levels to be resolved by fiscal year-end, particularly in enterprise and service provider segments. They noted customers are taking longer to implement shipped products, impacting revenue recognition.

    4. Margin Outlook and Cost Management
      Q: How are margins affected by supply chain and cost actions?
      A: Gross margins are stabilizing in the 66% to 67% range, with supply chain constraints largely behind. Management is implementing cost reductions, including headcount reductions, to maintain profitability amid challenging growth.

    5. Market Share and Long-Term Growth Targets
      Q: Is Cisco experiencing market share loss affecting growth targets?
      A: Management disputed share loss concerns, stating they gained market share in key markets like campus switching and wireless. They acknowledged data center switching shows share loss due to reporting differences but remain confident in long-term 5% to 7% growth targets.

    6. Impact of HPE-Juniper Deal
      Q: Does the HPE-Juniper deal create market uncertainty?
      A: Management indicated it's too early to see customer concerns from the HPE-Juniper deal impacting Cisco. They noted an increase of 50% in large wireless deals sequentially but saw no direct correlation.

    7. Order Trajectory and Bookings Outlook
      Q: When will orders turn positive again?
      A: While not providing specific guidance, management acknowledged that the second half will be more favorable than the first, indicating an improving order trajectory.

    8. Security Business Performance
      Q: Why is the security segment growing only 3%?
      A: Management anticipates acceleration in the second half, citing growth in new innovations like XDR and Secure Access, with over 230 customers on the XDR platform since its August launch.

    9. Webscale Presence and Growth
      Q: What is Cisco's presence in webscale opportunities?
      A: Cisco is designed into 21 use cases among webscale players. While inventory digestion affects current growth, management sees AI as a long-term tailwind for this segment.

    10. Customer Demand and AI Budgets
      Q: How are enterprises allocating budgets for AI?
      A: Management observed that customers are in early stages of AI strategy, with some holding back budgets to invest in AI initiatives once plans are finalized.

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