8-K: Cisco Reports Q3 Results, Names New Go-to-Market President

Cisco's third quarter results show a 13% year-over-year revenue decrease, but strong profitability and the appointment of Gary Steele as President of Go-to-Market.

Summary

• Cisco reported a third quarter revenue of $12.7 billion, a 13% decrease year-over-year.
• The company's GAAP net income was $1.9 billion, or $0.46 per share, a 41% decrease year-over-year.
• Non-GAAP net income was $3.6 billion, or $0.88 per share, a 12% decrease year-over-year.
• Splunk contributed $413 million to the total revenue.
• Total subscription revenue reached $6.9 billion, representing 54% of total revenue.
• Annualized recurring revenue (ARR) was $29.2 billion, including $4.2 billion from Splunk, up 22% year-over-year.
• Product ARR was $15.5 billion, up 44% year-over-year.
• Cisco's GAAP gross margin was 65.1%, and non-GAAP gross margin was 68.3%.
• The company's cash and cash equivalents and investments totaled $18.8 billion at the end of the quarter.
• Cisco returned $2.9 billion to stockholders through share buybacks and dividends in the quarter.
• The company declared a quarterly dividend of $0.40 per common share, payable on July 24, 2024.
• Cisco expects Q4 revenue to be between $13.4 billion and $13.6 billion, with non-GAAP EPS between $0.84 and $0.86.
• For fiscal year 2024, Cisco projects revenue between $53.6 billion and $53.8 billion, with non-GAAP EPS between $3.69 and $3.71.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are positive aspects like the ARR growth and the appointment of a new executive, the significant revenue and earnings declines, along with the negative impact of the Splunk acquisition, temper the overall outlook.

Positives

• Cisco's revenue was in line with expectations despite a 13% year-over-year decrease.
• The company demonstrated strong profitability with a GAAP gross margin of 65.1% and a non-GAAP gross margin of 68.3%.
• Subscription revenue is a significant portion of total revenue at 54%, indicating a successful shift to a recurring revenue model.
• Annualized recurring revenue (ARR) saw a substantial increase of 22% year-over-year.
• Product ARR grew by an impressive 44% year-over-year.
• The appointment of Gary Steele as President of Go-to-Market is expected to drive strategic growth.
• Cisco returned $2.9 billion to stockholders through share buybacks and dividends.
• The company's remaining performance obligations (RPO) increased by 21% year-over-year, indicating future revenue potential.

Negatives

• Cisco's total revenue decreased by 13% year-over-year.
• GAAP earnings per share decreased by 41% year-over-year.
• Non-GAAP earnings per share decreased by 12% year-over-year.
• The Splunk acquisition had a negative impact on both GAAP and non-GAAP EPS.
• Cash and cash equivalents and investments decreased from $26.1 billion at the end of fiscal 2023 to $18.8 billion at the end of Q3 2024.
• Cash flow from operating activities decreased by 24% year-over-year.

Risks

• The company faces risks related to business and economic conditions, including global economic uncertainties and geopolitical issues.
• Cisco's performance is subject to variations in customer demand and supply constraints.
• The company is exposed to risks associated with acquisitions, including integration challenges.
• Cisco faces increased competition in its product and service markets.
• The company is subject to litigation, cyber attacks, and data breaches.
• Cisco's financial results are subject to potential volatility.
• The company's operations are subject to currency fluctuations and other international factors.
• Changes in tax laws and regulations could impact Cisco's financial performance.

Future Outlook

Cisco expects Q4 revenue to be between $13.4 billion and $13.6 billion, with non-GAAP EPS between $0.84 and $0.86. For fiscal year 2024, Cisco projects revenue between $53.6 billion and $53.8 billion, with non-GAAP EPS between $3.69 and $3.71.

Management Comments

• Chuck Robbins, chair and CEO of Cisco, stated that the company delivered a solid Q3 performance in a dynamic environment.
• Scott Herren, CFO of Cisco, noted that revenue, gross margin, and non-GAAP EPS were at the high end or above the guidance range.
• Scott Herren also mentioned that customers are consuming equipment shipped over the last few quarters and demand is stabilizing.
• Management believes the addition of Splunk will be a catalyst for further growth.

Industry Context

Cisco's results reflect a broader trend in the tech industry where companies are shifting towards subscription-based models and focusing on recurring revenue streams. The acquisition of Splunk is a strategic move to enhance Cisco's capabilities in cybersecurity and observability, aligning with the increasing importance of these areas in the current market. The appointment of Gary Steele, a seasoned executive in the cybersecurity space, further underscores this strategic direction.

Comparison to Industry Standards

• Cisco's revenue decline of 13% year-over-year is notable, especially when compared to some of its peers in the networking and technology sector. For example, Juniper Networks reported a 16% year-over-year revenue decline in their most recent quarter, while Arista Networks saw a 16% year-over-year increase in revenue, highlighting the varied performance across the industry.
• Cisco's gross margin of 65.1% (GAAP) and 68.3% (non-GAAP) is competitive within the industry. Companies like Palo Alto Networks, which focuses on cybersecurity, often report higher gross margins, but Cisco's diversified portfolio impacts this metric.
• The shift towards subscription revenue is a common trend, with companies like Microsoft and Adobe leading the way. Cisco's 54% subscription revenue is a positive sign, but it still lags behind some software-focused companies.
• The ARR growth of 22% is a strong indicator of future revenue potential, but it is important to compare this to other companies with similar business models. For example, Salesforce, a leader in cloud-based software, has consistently reported strong ARR growth, often exceeding 20% year-over-year.
• The appointment of Gary Steele is a strategic move, similar to how other tech companies have brought in experienced leaders to drive growth and integration after acquisitions. For example, Broadcom's acquisition of VMware and subsequent leadership changes are comparable in terms of strategic intent.

Management Changes

Stakeholder Impact

• Shareholders will be impacted by the decrease in revenue and earnings, but may be encouraged by the growth in ARR and the strategic appointment of Gary Steele.
• Employees may experience changes due to the organizational restructuring and the integration of Splunk.
• Customers may benefit from the enhanced product offerings and services resulting from the Splunk acquisition.
• Suppliers may see changes in demand based on Cisco's performance and strategic direction.
• Creditors will be impacted by the company's financial performance and cash flow.

Next Steps

• Cisco will continue to integrate Splunk into its operations.
• The company will focus on executing its strategic plans under the leadership of Gary Steele.
• Cisco will hold a conference call to discuss the results and guidance.
• The company will pay a quarterly dividend on July 24, 2024.

Key Dates

Keywords

Cisco, Earnings, Revenue, Splunk, ARR, Subscription, Gross Margin, EPS, Gary Steele, Acquisition, Networking, Security, Observability