Following Cisco Systems' release of its financial results on August 14th, key observations from the subsequent market analyst call provide insight into the company’s performance, strategic shifts, and future outlook. Cisco reported strong fourth-quarter results for fiscal year 2024, with $13.6 billion in revenue, surpassing its guidance range. The company demonstrated robust demand across its product lines, particularly in security, AI infrastructure, and observability, while also outlining a strategic restructuring plan aimed at driving growth in high-priority areas such as AI, cloud, and cybersecurity.
During the call, Cisco execs highlighted robust performance in its security, AI infrastructure, and observability segments. The integration of Splunk into Cisco's broader portfolio was a significant contributor to this success, with Splunk adding $960 million in revenue for the quarter. Cisco's gross margin reached 67.5%, the highest in 20 years, reflecting the strong impact of this acquisition. The company also announced a strategic restructuring plan that includes a 7% workforce reduction, aimed at reallocating resources toward high-growth areas such as AI, cloud, and cybersecurity.
A notable theme throughout the call was Cisco's focus on AI. The company has crossed $1 billion in AI-related orders from web-scale customers and expects an additional $1 billion in fiscal year 2025. Cisco's AI-driven products, including Hypershield, are expected to enhance its position in the market as enterprises increasingly modernize their infrastructure to support AI applications. The company also emphasized the normalization of customer inventory levels, signaling the end of a challenging period of inventory digestion.
Some observations from the call:
Subscription Revenue: Subscription revenue accounted for 56% of Cisco's total revenue in Q4 2024.
Splunk Contribution: Splunk integration contributed $960 million in revenue for Q4, with continued double-digit ARR growth.
AI Infrastructure Investments: Strong demand for AI-related infrastructure, with double-digit growth in data center switching.
Security Product Orders: Security product orders grew by double digits, driven by competitive wins and new solutions like XDR and Secure Access.
Wireless Order Growth: Wireless product orders exceeding $1 million increased by over 20% year-over-year.
Gross Margin: Cisco achieved a product gross margin of 67% and a services gross margin of 70.3% in Q4.
Operating Cash Flow: Cisco generated $3.7 billion in operating cash flow during Q4 2024.
Shareholder Returns: Cisco returned $3.6 billion to shareholders through dividends and share repurchases in Q4, totaling $12.1 billion for FY24.
Public Sector Demand: Public sector demand increased by 20% year-over-year, with strong federal spending in the U.S. and growth in APJC (Asia Pacific, Japan, and China).
Enterprise Demand: Enterprise demand rebounded with 13% growth, showing strength across all geographies, particularly in APJC.
Service Provider and Cloud: Service provider and cloud product orders grew by 5%, with notable strength in EMEA (Europe, Middle East, and Africa).
AI Orders: Cisco secured over $1 billion in AI-related orders from web-scale customers and expects another $1 billion in FY25.
Platform Deals: Cisco signed several nine-figure platform deals, including a significant agreement with a global logistics company to modernize its AI-powered supply chain.
Observability Growth: Observability product revenue grew 41% year-over-year, with contributions from Splunk, ThousandEyes, and Cisco’s observability suite.
Networking Segment: Cisco's networking segment revenue declined by 28% year-over-year, impacted by comparisons to a strong Q4 2023 driven by backlog clearance.
Hypershield Launch: Cisco introduced Hypershield, an AI-native cybersecurity solution, expected to be available in the fall of 2024.
R&D Focus: Over 50% of Cisco’s R&D spend is now focused on AI, cloud, and cybersecurity.
AI-Specific Orders: Cisco's partnerships with top hyperscalers are driving AI-related orders, including design wins that are expected to convert into significant revenue.
Customer Inventory Levels: Cisco confirmed that customer inventory levels have normalized, ending a period of inventory digestion that had affected order flow.
Long-Term Revenue Headwind: Cisco acknowledged a revenue headwind for FY25 due to a strong backlog shipment in Q1 FY24, which will not be repeated.
Global Revenue Performance: Revenue growth was observed across all geographic segments, with the Americas up 15%, EMEA up 12%, and APJC up 16%.
Product Recurring Revenue: Product annual recurring revenue (ARR) grew by 43% with Splunk and by 9% excluding Splunk.
Sales Strategy Shift: Cisco's sales strategy is increasingly focused on cross-portfolio sales, leveraging the combined strengths of Cisco and Splunk to win large enterprise deals.
Workforce Reduction: The restructuring plan, impacting approximately 7% of the workforce, or 7,000 employees, is aimed at reallocating resources toward AI, cloud, and cybersecurity initiatives. Some of the restructuring involves moving some operations to lower-cost location.
Fiscal Year Guidance: For fiscal year 2025, Cisco expects revenue in the range of $55 billion to $56.2 billion, with non-GAAP EPS between $3.52 and $3.58.
A replay of the call is available on the company's investor relations web site.
https://investor.cisco.com/home/default.aspx
