8-K: Cisco Reports Mixed Q2 Results, Announces Restructuring Plan

Cisco's second quarter revenue declined by 6% year-over-year, while the company announced a restructuring plan impacting 5% of its global workforce.

Summary

• Cisco reported a second quarter revenue of $12.8 billion, a 6% decrease compared to the same period last year.
• GAAP earnings per share (EPS) were $0.65, down 3% year-over-year, while non-GAAP EPS was $0.87, down 1% year-over-year.
• The company's total software revenue was flat year-over-year, but software subscription revenue increased by 5%.
• Annualized recurring revenue (ARR) reached $24.7 billion, a 6% increase year-over-year, with product ARR up 9%.
• Remaining performance obligations (RPO) totaled $35.7 billion, up 12% year-over-year.
• Cisco announced a restructuring plan that will impact approximately 5% of its global workforce, with estimated pre-tax charges of $800 million.
• The company increased its quarterly dividend by 3% to $0.40 per share.
• Cisco provided guidance for Q3 FY24 with revenue expected to be between $12.1 billion and $12.3 billion and non-GAAP EPS between $0.84 and $0.86.
• Full year FY24 revenue is expected to be between $51.5 billion and $52.5 billion with non-GAAP EPS between $3.68 and $3.74.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the revenue decline and restructuring announcement, but there are positive aspects such as the dividend increase and growth in recurring revenue.

Positives

• Software subscription revenue increased by 5% year-over-year.
• Total annualized recurring revenue (ARR) increased by 6% year-over-year.
• Remaining performance obligations (RPO) increased by 12% year-over-year.
• The company increased its quarterly dividend by 3% to $0.40 per share.
• Cisco is making progress in its business model shift to more recurring revenue.

Negatives

• Total revenue decreased by 6% year-over-year.
• GAAP EPS decreased by 3% year-over-year.
• Non-GAAP EPS decreased by 1% year-over-year.
• Cash flow from operating activities decreased by 83% compared to the same quarter last year.
• Product revenue was down 9% year-over-year.

Risks

• The restructuring plan may not achieve the anticipated benefits and could result in changes to the size and timing of related charges.
• The company faces risks related to business and economic conditions, global economic uncertainties, and geopolitical environment.
• There are risks associated with the development and use of artificial intelligence.
• Cisco is exposed to supply constraints, variations in customer demand, and component cost variability.
• The company faces increased competition in its product and service markets.
• There are risks related to cyber attacks, data breaches, and other security incidents.

Future Outlook

Cisco expects Q3 FY24 revenue to be between $12.1 billion and $12.3 billion, with non-GAAP EPS between $0.84 and $0.86. Full year FY24 revenue is expected to be between $51.5 billion and $52.5 billion, with non-GAAP EPS between $3.68 and $3.74.

Management Comments

• Chuck Robbins, chair and CEO of Cisco, stated that they delivered a solid second quarter with strong operating leverage and capital returns.
• Scott Herren, CFO of Cisco, mentioned that they are making good progress in their business model shift to more recurring revenue while remaining focused on financial discipline.

Industry Context

Cisco's results reflect a mixed performance in the technology sector, with some areas of growth in software and recurring revenue, but also challenges in overall revenue and product sales. The restructuring plan indicates a strategic shift to align with future growth opportunities, which is a common theme in the industry as companies adapt to changing market conditions and technological advancements.

Comparison to Industry Standards

• Cisco's revenue decline of 6% year-over-year is a concern, especially when compared to some competitors in the tech industry that have shown growth.
• The growth in ARR and RPO is a positive sign, indicating a shift towards a more predictable revenue model, similar to other software and service-focused companies like Microsoft and Salesforce.
• The restructuring plan, while necessary, is a common strategy among large tech companies to optimize operations and reduce costs, similar to recent moves by companies like Google and Amazon.
• Cisco's dividend increase of 3% is a positive signal for investors, aligning with the trend of returning value to shareholders, which is a common practice among mature tech companies like Apple and IBM.
• The company's non-GAAP gross margin of 66.7% is competitive with other hardware and software companies, but the GAAP gross margin of 64.2% indicates the impact of non-cash expenses.

Stakeholder Impact

• Shareholders will be impacted by the dividend increase and share buybacks, but also by the restructuring plan and revenue decline.
• Employees will be affected by the restructuring plan, which will result in job losses for approximately 5% of the global workforce.
• Customers may experience changes in service and product offerings as Cisco realigns its organization.
• Suppliers may be impacted by changes in Cisco's supply chain and procurement strategies.
• Creditors will be impacted by the company's financial performance and restructuring activities.

Next Steps

• Cisco will implement its restructuring plan, which is expected to be completed by the first half of fiscal 2025.
• The company will continue to focus on its business model shift to more recurring revenue.
• Cisco will hold a conference call on February 14, 2024, to discuss the results and guidance.

Key Dates

Keywords

Cisco, revenue, earnings, restructuring, ARR, RPO, dividend, software, networking, security, collaboration, observability