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    Cisco Systems Inc (CSCO)

    Q3 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$52.42January 26, 2024
    Final Price$47.86April 26, 2024
    Price Change$-4.56
    % Change-8.70%

    What went well

    • Cisco expects demand normalization starting in FY'25, as inventory digestion is progressing as planned, with positive signs in key markets like the Americas and Europe. ,
    • Cisco anticipates $1 billion in AI-related orders in fiscal 2025, driven largely by web-scale infrastructure wins, including having 3 out of 4 major web-scale players using their AI Ethernet fabric, with enterprise pipeline also beginning to materialize. ,
    • Increasing demand for Cisco's security products, with high single-digit growth in orders and the ramp-up of new innovative products, is expected to drive significant improvement in FY'25 and beyond, further enhanced by the integration of Splunk.

    What went wrong

    • Increased operating expenses in fiscal 2025 due to integration costs and investments from the Splunk acquisition are expected to pressure margins and may lead to flat or even lower earnings per share compared to fiscal 2024.
    • Revenue synergies from the Splunk acquisition may take longer to materialize, with expectations that significant contributions won't occur until the second half of fiscal 2025 or later due to long sales cycles of 6 to 9 months.
    • Intensifying competition in the security and SIEM market, with competitors consolidating and potential pricing pressures, could impact Cisco's growth in this area, as security revenue excluding Splunk grew only 3% year-over-year.

    Q&A Summary

    1. AI Revenue Outlook
      Q: What is driving the $1B AI orders next year?
      A: The anticipated $1 billion in AI orders for fiscal '25 are primarily from back-end infrastructure for web-scale customers, involving systems based on Silicon One and optics. We have identified specific opportunities with high confidence—not just targets but actual deals we expect to win.

    2. Inventory Digestion Impact
      Q: How is inventory digestion affecting growth expectations?
      A: Customers are on track with inventory digestion, which is positive. As this completes by end of Q4, we expect demand to normalize starting in Q1 fiscal '25 and beyond, supporting mid-single-digit growth in our core business next year.

    3. Splunk Revenue Synergies
      Q: When will Splunk synergies contribute to growth?
      A: Revenue synergies from the Splunk acquisition are expected to ramp in the second half of fiscal '25. We've identified 5,000 customers where Cisco is strong and Splunk isn't present. We're incentivizing our sales teams to penetrate these accounts, with sales cycles of 6 to 9 months.

    4. OpEx Investments and Earnings
      Q: Why will OpEx rise, impacting earnings in '25?
      A: We're investing in integrating Splunk, including product integration, organizational alignment, channel enablement, and sales training. This will increase OpEx in fiscal '25, delaying EPS accretion to fiscal '26. The investment is necessary to achieve the revenue synergies we anticipate.

    5. Security Business Outlook
      Q: What's the growth outlook for security excluding Splunk?
      A: Our security revenue grew 3% excluding Splunk, but demand was the highest in a couple of years at high single digits. New products are ramping, and we expect significant improvement in the second half of '24 and stronger growth in '25.

    6. Gross Margin Expectations
      Q: How will margins be affected next year?
      A: We expect gross margins in the 66.5% to 67.5% range for fiscal '25, similar to our Q4 guidance. While Splunk contributes positively to gross margins, some one-time benefits we had this year won't repeat longer term.

    7. Order Trends Normalization
      Q: When will order trends return to normal?
      A: We anticipate order trends will normalize starting in the second half of fiscal '25, as customers complete inventory digestion and demand stabilizes.

    8. Leverage and Cash Usage
      Q: How will you use excess cash given increased leverage?
      A: Our cash allocation priorities remain unchanged: support growth, maintain the dividend, and return cash through $1.25 billion per quarter in share buybacks. We'll evaluate deleveraging or returning excess cash to shareholders as appropriate.

    9. Competitive Landscape in Security
      Q: How does consolidation in security affect your business?
      A: Despite market consolidation, we're well-positioned with a strong market presence. Our innovation, leadership in the SIEM market, and integration with Cisco enhance our offerings. We haven't changed our pricing strategy.

    10. AI Opportunities with Enterprises
      Q: What are enterprises doing with AI and how does it affect you?
      A: Enterprise customers are beginning to run pilots for AI infrastructure, but it's still very early. We've had some wins in the enterprise space, but broader adoption will take time.

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