Cisco Systems, Inc. (NASDAQ:CSCO) Q1 2024 Earnings Call Transcript

Cisco Systems, Inc. (NASDAQ:CSCO) Q1 2024 Earnings Call Transcript November 15, 2023

Cisco Systems, Inc. beats earnings expectations. Reported EPS is $1.11, expectations were $1.03.

Operator: Welcome to Cisco’s First Quarter Fiscal Year 2024 Financial Results Conference Call. At the request of Cisco, today’s conference is being recorded. If you have any objections you may disconnect. Now, I would like to introduce Sami Badri, Head of Investor Relations. Sir, you may begin.

Sami Badri: Welcome, everyone, to Cisco’s first quarter fiscal year ’24 quarterly conference call. This is Sami Badri, Cisco’s new Head of Investor Relations, and I’m joined by Chuck Robbins, our Chair and CEO; and Scott Herren, our CFO. Having followed Cisco on the sell-side for 10 years, I couldn’t be more excited to join the company and look forward to engaging with you all in my new role. By now, you should have seen our earnings press release. A corresponding webcast with slides, including supplemental information, will be available on our website in the Investor Relations section following the call. As a reminder, we have simplified how we report product and service revenue and customer markets. Starting this quarter, we are reporting revenue in the following five categories: networking, security, collaboration, observability, and services.

And we are reporting customer markets in the following three categories: enterprise, public sector, and service provider and cloud. Also, as is customary in Q1, we have made certain reclassifications to prior period amounts to conform to the current period’s presentation. Income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements and other financial information can also be found in the Financial Information section of our Investor Relations website. Throughout this conference call, we will be referencing both GAAP and non-GAAP financial results, and we’ll discuss product results in terms of revenue and geographic and customer results in terms of product orders unless stated otherwise. All comparisons made throughout this call will be on a year-over-year basis.

The matters we will be discussing today include forward-looking statements, including the guidance we will be providing for the second quarter and full year of fiscal 2024. They are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on forms 10-K which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. With respect to guidance, please also see the slides and press release that accompany this call for further details. Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. I will now turn it over to Chuck.

Chuck Robbins: Thanks, Sami, and welcome to Cisco. I hope everyone is doing well, and thanks for joining us today. We delivered a solid start to fiscal 2024, with the strongest first quarter results in Cisco’s history in terms of revenue and profitability. Our Q1 revenue was at the upper end of our guided range. EPS exceeded the high end of our guidance, driven by strength in gross margins and expense control, resulting in strong operating leverage. Our disciplined expense management and the tailwinds from our business model transformation resulted in our highest non-GAAP gross margin in over 17 years and record non-GAAP operating margin. We also returned $2.8 billion in Q1 via cash dividends and share repurchases, delivering on our capital return commitments to our shareholders.

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Q&A Session

As we continue to transform our business towards more software and recurring revenue streams, fueled by accelerated innovation, we remain committed to driving operating leverage and shareholder returns. Now turning to the demand environment, after three quarters of exceptionally strong product delivery, our customers are now focused on installing and implementing these unprecedented levels of products. The bottleneck that we previously saw in the supply chain has now shifted downstream to implementation by our customers and partners. Our order lead times and backlog have largely returned to normal levels. As deliveries rose, the channel inventory we track at our distributors also steadily declined during this time. Simply put, customers are now taking time to onboard and deploy these heightened product deliveries.

While the macro challenges we have discussed still exist, we believe this implementation phase is the primary reason for the slowdown in new orders. We saw it mostly with our larger enterprise, service provider, and cloud customers, and it was most pronounced in October. Based on our analysis, we believe this phase is temporary and estimate there is an additional one quarter to two quarters worth of shipped orders in customers’ hands, still waiting to be deployed. This has near-term consequences for revenue and our outlook for the next couple of quarters, which Scott will discuss shortly. However, it does not change our longer-term confidence. We expect product order growth rates to increase in the second half of the fiscal year. We also remain very confident in the foundational strength of our business and future growth opportunities given the criticality of our technologies.

Overall, our win rates are stable, cancellation and return rates remain below pre-pandemic levels, and we have gained market share, all of which are testaments to the strength of our portfolio and how it aligns to our customers’ most pressing needs. As we look to enhance our capabilities in higher growth areas, in the first quarter of fiscal ’24, we announced our intent to acquire Splunk. The combination of Cisco and Splunk will create an end-to-end data platform to enhance our customers’ digital resiliency with our complementary capabilities in AI, security, and observability. The combination of Cisco and Splunk also directly supports our strategic objectives around driving higher levels of growth, software capabilities, and ARR. Together, we will bring trusted innovation leadership and outstanding go-to-market engine and a world-class culture that will help our customers achieve their technology outcomes with innovative products and solutions.

Now, let me comment on our quarterly performance. As I previously mentioned, we delivered strong revenues in Q1, which was broad-based across our product portfolio and driven by our customers’ investments in generative AI, cloud, security and full stack observability. As expected, we continued to gain market share with the release of the calendar Q2 results, recording another quarter of year-over-year gains in three of our largest networking markets: campus switching, wireless LAN and SP routing. In webscale, we see continued momentum in AI, with three of the top four customers deploying our hyperscale ethernet AI fabric. We also already have line of sight to over $1 billion in orders for AI infrastructure from major cloud providers in fiscal year ’25.

To help advance AI, we are working with key GPU and storage partners to create solutions including ethernet technologies, GPU-enabled infrastructure, and joint tested and validated reference architectures with a commitment to open networking for AI. Collectively, we believe there is a great opportunity for a broad set of innovations and compute GPU networking software and services to support core and edge AI infrastructure. According to the 650 Group, the AI switching market is forecasted to exceed $10 billion in 2027. Our scalable fabric for AI, coupled with a proven power saving capabilities of Cisco Silicon One put us in a strong position to build-out the infrastructure needed for AI clusters and we are laser-focused on winning in this space.

Moving to Security, we continue to execute against our product roadmap and strengthen our unified security platform. Since our Cisco XDR solution became available this summer, we have added recovery to the response process giving security teams the ability to snapshot and restore their business critical data at the first sign of a ransomware attack. With our three new offers around XDR, Cisco Secure Access and Multicloud Defense, we already have over $500 million in the pipeline across over 1,000 customers. We also launched our new Cisco security firewall solution this quarter. We are actively engaged in competitive sales with all these products and expect to see meaningful positive results in the coming quarters. In our Collaboration portfolio, we recently introduced a range of truly game changing AI capabilities, spanning the entire Webex suite as well as new devices for reimagined workspaces at our WebexOne event.

Before I turn it over to Scott, let me briefly summarize three key takeaways. First, as we consider where we’re at today, the primary issue with demand is that customers are taking time to onboard and deploy heightened product deliveries. While we were not immune to the macro, we believe this is temporary as our customers and partners continue to tell us that our portfolio is stronger than ever and we have continued to see share gains in key markets. Second, we remain confident in our future, with the incremental multi-billion dollar AI infrastructure opportunity, the increasing criticality of security and observability, and what we believe Cisco and Splunk can do together for our customers is truly exciting. Lastly, you can always count on us to take a disciplined approach, regardless of the environment.