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pww.comCisco Systems, Inc., Q3 2024 Earnings Call, May 15, 2024 - SEHK:4333

SEHK:4333

Ahmed Sami Badri [Head of Investor Relations] 💬

Ahmed Sami Badri, the Head of Investor Relations at Cisco Systems, Inc., made the following comments during the Q3 2024 Earnings Call:

  1. Opening Remarks:

    • Welcomed everyone to the Third Quarter Fiscal Year '24 Conference Call.
    • Introduced the executives present: Chuck Robbins, Chair and CEO; Scott Herren, CFO; and Gary Steele, President of Go-to-Market, who joined following the acquisition of Splunk.

  2. Financial Information Availability:

    • Mentioned that a webcast with slides, including supplemental information, would be available on the company's website in the Investor Relations section after the call.
    • Noted that income statements, full GAAP to non-GAAP reconciliation information, balance sheets, cash flow statements, and other financial information could be found in the Financial Information section of the Investor Relations website.

  3. Forward-Looking Statements:

    • Reminded listeners that the discussion included forward-looking statements, including guidance for the fourth quarter and full year of fiscal 2024.
    • Emphasized that such statements were subject to risks and uncertainties, as detailed in the company's SEC filings, specifically the most recent reports on Forms 10-K and 10-Q.
    • Stated that further details on guidance could be found in the accompanying slides and press release.

  4. Handover to Chuck Robbins:

    • Turned the call over to Chuck Robbins, the Chair and CEO of Cisco.

  5. Closing Remarks:

    • Announced the date and time for the 2024 Investor Day, which would be part of Cisco Live on June 4, 2024.

    • Provided the date and time for the next quarterly call, reflecting the fiscal year 2024 fourth quarter and full year results, which would be on Wednesday, August 14, 2024, at 1:30 p.m. Pacific Time, 4:30 p.m. Eastern Time.

    • Invited participants to contact the Cisco Investor Relations department for further questions and thanked everyone for joining the call.

Charles H. Robbins [Chairman & CEO] 💬

During the Cisco Systems, Inc. Q3 2024 Earnings Call, Charles H. Robbins, Chairman & CEO, provided the following comments:

Opening Remarks

  • Performance Overview:

    • Delivered a solid performance in Q3 with organic revenue at the high end of guidance.
    • Strong operating leverage drove better-than-expected earnings per share.
    • Annualized recurring revenue, remaining performance obligations, and subscription revenue continued to grow.

  • Business Transformation:

    • Revenue from subscriptions now accounts for more than half of total revenue, even before the Splunk acquisition.
    • The transformation positions Cisco to drive long-term growth through innovation.

  • Research and Development:

    • Thanked the entire Cisco team for strengthening the research and development engine across various areas such as networking, silicon, observability, security, collaboration, and AI.

  • Financial Performance: - Core business produced strong cash flows, enabling consistent capital returns.

    • Returned $2.9 billion to shareholders in Q3 through share repurchases and cash dividends, with a total of $8.5 billion returned year-to-date.

  • Key Developments:

    • Splunk Acquisition:
      • Successful close of Cisco's largest-ever acquisition, contributing over $4 billion in annualized recurring revenue.
      • Splunk adds to Cisco's position as one of the largest software companies globally.
      • The unified platform will revolutionize how customers connect and protect their organizations using data.
    • Cisco Hypershield Launch:
      • Introduction of Cisco Hypershield, a groundbreaking AI-powered approach to highly distributed security.
      • Hypershield combines security and networking, built into the networking fabric, bringing hyperscaler security and connectivity to enterprises.

  • Customer Demand:

    • Based on activations to the cloud and conversations with customers and partners, customers are steadily deploying their inventory in line with expectations.
    • Product orders grew in key portfolios such as data center switching, campus switching, security, and collaboration.
    • Public sector performance was impacted in the Americas due to continuing resolution discussions, but this has since cleared with the signing of the latest U.S. federal government funding legislation.

  • Win Rates:

    • Win rates are stable, reflecting competitive strength and successful execution.
    • Cisco is expected to be the only net share gainer within large network budgets over the next 12 months according to recent sell-side research IT spending surveys.

  • Q3 Performance Details:

    • Security and observability portfolios grew year-over-year, excluding Splunk.
    • Launched Cisco Hypershield, the first truly distributed AI-native cybersecurity solution, which will be built into Cisco's networking fabric.
    • Introduced the integration of Cisco XDR with Splunk Enterprise Security, providing customers with more value and insights.
    • Identified 5,000 existing Cisco customers with the potential to become meaningful Splunk customers, and sales teams are already making connections.
    • Splunk was ranked as the leader in Gartner's Magic Quadrant for security incident and event management.

  • AI Infrastructure Opportunity:

    • Continued to see momentum in web scale with 3 of the top 4 hyperscalers deploying Cisco's Ethernet AI fabric.
    • Additional design wins based on Cisco's 51.2 terabit G200 Silicon One ASIC, expected to yield orders in fiscal year '25.
    • Partnership with NVIDIA offers easy-to-deploy cloud-based and on-prem networking solutions for AI inferencing.

  • Leadership Update:

    • Announced that Jeff Sharritts, Chief Customer and Partner Officer, is departing Cisco.
    • Gary Steele, Splunk's former CEO, has been named Cisco's new President of Go-to-Market.
    • Gary will work closely with Robbins to set and execute strategic plans and goals for the company.

Q&A Session

  • Macro Environment:

    • Robbins noted that the quarter showed slight improvement as it progressed, with the end of the quarter being stronger than the beginning.
    • Customers are still ruthlessly prioritizing IT investments, but there was no fundamental shift in the macro environment.
    • Positive signs included the Americas, excluding Splunk, being up 2%, and Europe being flat.

  • AI Orders:

    • The $1 billion of AI orders in fiscal '25 is primarily driven by the web scale infrastructure, with 3 out of 4 hyperscalers running Cisco's AI Ethernet fabric.
    • Additional design wins in the back-end networks inside web scale players.
    • Enterprise pipeline is beginning to materialize.

  • Security Growth:

    • Demand for security products was the highest in a couple of years, with high single-digit growth.
    • New products are ramping, and customers are testing and implementing them.
    • Security portfolio is largely ratable, impacting the time for orders to transition into revenue.

  • Splunk Integration:

    • Announced the first integration between Cisco XDR and Splunk Enterprise Security at RSA.
    • Intent is to continue pushing innovation out, with more announcements planned for Cisco Live.
    • Security and Splunk integration will drive growth for the security portfolio broadly and Splunk.

  • AI Timing:

    • Timing of AI orders is expected to start low at the beginning of fiscal '25 and ramp as the year progresses.
    • More clarity on the timing of pilots will be available in the next 90 days.

  • Core Cisco Growth:

    • Acknowledged the impact of the backlog work-off in fiscal '25, stating that '26 over '25 will be the year for real apples-to-apples year-over-year comparisons.
    • Detailed breakdown of Cisco and Splunk contributions will be provided at the upcoming Analyst Day.

  • AI Opportunities:

    • Conversations with enterprise customers indicate they are still exploring use cases and architectures for AI.
    • A handful of wins in the enterprise space for infrastructure supporting AI build-outs, but it is still early.

  • Demand Normalization:

    • Based on current visibility, expects demand normalization starting in Q1 of fiscal '25, with the caveat of potential risks and geopolitical events.

Robbins's remarks highlighted the strong performance of Cisco in Q3, the transformative impact of the Splunk acquisition, and the company's optimism about the future of AI, security, and infrastructure.

Richard Scott Herren [Executive VP & CFO] 💬

Richard Scott Herren, the Executive Vice President and CFO of Cisco Systems, provided financial details and outlook during the Q3 2024 Earnings Call. Here’s a detailed summary of his statements:

Summary of Q3 2024 Performance:

  • Financial Results:

    • Total revenue: $12.7 billion, down 13% YoY.
    • Non-GAAP net income: $3.6 billion, down 14%.
    • Non-GAAP earnings per share (EPS): $0.88, down 12%.
    • Splunk contributed $413 million in revenue in the partial quarter post-close.
    • The interest cost of financing the Splunk acquisition slightly more than offset the positive operating impact of Splunk, resulting in a negative impact of $0.01 on non-GAAP earnings per share.

  • Revenue Breakdown:

    • Total product revenue: $9 billion, down 19%.
    • Service revenue: $3.7 billion, up 6%.
    • Networking: Down 27%.
    • Security: Up 36% (including Splunk), up 3% excluding Splunk.
    • Collaboration: Flat.
    • Observability: Up 27% (including Splunk), up 14% excluding Splunk.

  • Financial Metrics:

    • Annualized Recurring Revenue (ARR): $29.2 billion, up 22%.
    • Product ARR: Up 44%.
    • Without Splunk, ARR: $25 billion, up 5%.
    • Total subscription revenue: Up 12% to $6.9 billion, representing 54% of Cisco's total revenue.
    • Total software revenue: Up 5% to $4.5 billion, with software subscription revenue up 17%.
    • 91% of total software revenue was subscription-based.
    • Total Remaining Performance Obligations (RPO): $38.8 billion, up 21%.

  • Orders:

    • Product orders: Up 4%.
    • Excluding Splunk, product orders were flat YoY.

  • Geographic Segments:

    • Americas: Up 6%.
    • EMEA: Up 4%.
    • APJC: Down 1%.

  • Customer Markets:

    • Service provider and cloud: Up 10%.
    • Public sector: Up 6%.
    • Enterprise: Up 2%.

  • Margins:

    • Total non-GAAP gross margin: 68.3%, up 310 basis points YoY.
    • Product gross margin: 66.9%, up 240 basis points.
    • Service gross margin: 71.6%, up 430 basis points.
    • Non-GAAP operating margin: 34.2%, up 30 basis points.

  • Cash Flow:

    • Operating cash flow: $4 billion, down 24%.

  • Balance Sheet:

    • Total cash, cash equivalents, and investments: $18.8 billion.
    • Net outflow related to the acquisition of Splunk: $27.4 billion.

  • Capital Allocation:

    • Returned $2.9 billion in value to shareholders, including $1.6 billion for the quarterly cash dividend and $1.3 billion of share repurchases.
    • Year-to-date, returned $8.5 billion in capital to shareholders.

Guidance for Q4 2024:

  • Revenue: Expected to be in the range of $13.4 billion to $13.6 billion.
  • Non-GAAP Gross Margin: Expected to be in the range of 66.5% to 67.5%.
  • Non-GAAP Operating Margin: Expected to range from 31.5% to 32.5%.
  • Non-GAAP EPS: Expected to range from $0.84 to $0.86.
  • Splunk Impact: Expected to contribute $950 million to $1 billion in revenue and negatively impact non-GAAP EPS by $0.03.

Fiscal Year 2024 Guidance:

  • Revenue: Expected to be in the range of $53.6 billion to $53.8 billion.
  • Non-GAAP EPS: Expected to range from $3.69 to $3.71.

Outlook for Fiscal Year 2025:

  • Revenue Growth: Expected to be in the low to mid-single-digit range.
  • Interest Impact: Expected to be a headwind of approximately $350 million per quarter.
  • Operating Margins: Expected to be in line with Q4 guidance.
  • Deal Accretion: Expect the deal to be non-GAAP earnings per share accretive in fiscal 2026 and beyond.

Additional Points:

  • Splunk Integration: Working to quickly integrate Splunk into product offerings and go-to-market engine, expecting to invest in OpEx in fiscal 2025 to drive revenue synergies.

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