Yahoo Finance Cisco Systems Inc (CSCO) Q3 2024 Earnings Call Transcript Highlights: Navigating Challenges and ...
Total Revenue: $12.7 billion, down 13% year-over-year.
Net Income (Non-GAAP): $3.6 billion, down 14%.
Earnings Per Share (Non-GAAP): $0.88, down 12%.
Gross Margin: 68.3%, up 310 basis points year-over-year.
Operating Cash Flow: $4 billion, down 24%.
Product Orders: Up 4% overall; flat year-over-year excluding Splunk.
Security Revenue: Up 36%, including Splunk; up 3% excluding Splunk.
Observability Revenue: Up 27%, including Splunk; up 14% excluding Splunk.
Annual Recurring Revenue (ARR): $29.2 billion, up 22%.
Subscription Revenue: $6.9 billion, representing 54% of total revenue.
Software Revenue: $4.5 billion, up 5%; software subscription revenue up 17%.
Remaining Performance Obligations (RPO): $38.8 billion, up 21%.
Shareholder Returns: $2.9 billion through share repurchases and dividends in Q3; $8.5 billion year-to-date.
Release Date: May 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Cisco Systems Inc (NASDAQ:CSCO) reported strong operating leverage and gross margins exceeding expectations, leading to better-than-anticipated earnings per share.
The acquisition of Splunk significantly expands Cisco Systems Inc (NASDAQ:CSCO)'s portfolio, adding over $4 billion in annualized recurring revenue and enhancing its position as a major software company.
Cisco Systems Inc (NASDAQ:CSCO) introduced Cisco Hypershield, a groundbreaking AI-powered security innovation, enhancing its security capabilities.
Annualized recurring revenue, remaining performance obligations, and subscription revenue showed good growth, with subscriptions now accounting for more than half of total revenue.
Cisco Systems Inc (NASDAQ:CSCO) returned $2.9 billion to shareholders through share repurchases and dividends in Q3, with a total of $8.5 billion returned year-to-date.
Negative Points
Total revenue for Q3 was $12.7 billion, down 13% year-over-year, impacted by the high base effect of previous excess backlog shipments.
Excluding the impact of Splunk, product orders were flat year-on-year, indicating potential challenges in organic growth.
The interest cost of financing the Splunk acquisition slightly more than offset the positive operating impact, negatively affecting non-GAAP earnings per share by $0.01.
Networking, the largest product category, saw a 27% decline across all geographic segments, reflecting ongoing inventory adjustments by customers.
Operating cash flow decreased by 24% to $4 billion, reflecting the challenges in the macroeconomic environment and inventory digestion.
Q & A Highlights
Q: Can you discuss the macro environment and its impact on Cisco's performance, particularly in relation to inventory digestion? A: (Charles H. Robbins - Chairman & CEO) The macro environment showed slight improvement towards the end of the quarter. Cisco's inventory digestion is on track, with the Americas showing a 2% increase excluding Splunk. Customers continue to prioritize their IT investments, but there hasn't been a fundamental shift in the macro environment.
Q: Could you provide more details on the $1 billion AI orders expected in fiscal '25? Where are these wins expected to come from? A: (Charles H. Robbins - Chairman & CEO) The $1 billion in AI orders is primarily driven by infrastructure for web scale players, with three out of four using Cisco's AI Ethernet fabric. The orders are expected from both systems and optics across these customers, with some enterprise pipeline beginning to materialize.
Q: Can you elaborate on the 5,000 customer opportunities for Splunk and what that could mean financially? A: (Gary L. Steele - Executive VP & GM of Splunk) Cisco has identified 5,000 customers where Splunk has no presence, and Cisco's sales teams are poised to introduce Splunk solutions. This initiative is supported by financial incentives for Cisco sellers and is expected to significantly expand Splunk's customer base.
Q: What is the expected timing for realizing benefits from new security products, Splunk integration, and AI opportunities? A: (Charles H. Robbins - Chairman & CEO) New security products are ramping up, with revenue growth expected in the second half of '24 and more substantial results in '25. AI opportunities are likely to ramp up towards the second half of '25 as enterprise pilots progress.
Q: How should we think about the OpEx investments related to Splunk and its impact on fiscal '25 earnings? A: (Richard Scott Herren - Executive VP & CFO) Fiscal '25 will see investments in integrating Splunk, focusing on product and go-to-market strategies. While there will be some cost synergies, the primary focus is on driving revenue synergies, which are expected to ramp up in the second half of the fiscal year.
Q: Can you discuss the competitive landscape for Splunk, especially with recent market consolidations, and how Cisco plans to maintain its pricing and market position? A: (Gary L. Steele - Executive VP & GM of Splunk) Despite the competitive landscape, Splunk maintains a strong position, highlighted by its leadership in Gartner's Magic Quadrant for SIEM. Splunk continues to innovate, integrating with Cisco's security solutions to enhance value and maintain competitive pricing without fundamental changes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.
