Cisco Systems, Inc., Q1 2025 Earnings Call, Nov 13, 2024 - SEHK:4333

SEHK:4333

Ahmed Sami Badri, Head of Investor Relations, welcomed participants to Cisco's First Quarter Fiscal Year 2025 Financial Results Conference Call. He introduced Chuck Robbins, Chair and CEO, and Scott Herren, CFO. Ahmed noted that Cisco's earnings press release and supplemental information, including GAAP to non-GAAP reconciliations, are available on the Investor Relations website. He emphasized that the call would include forward-looking statements and referred to the SEC filings for important risk factors. Ahmed also mentioned that Cisco will not comment on its financial guidance during the quarter unless done through an explicit public disclosure.

**- Cisco delivered a strong start to fiscal '25 with $13.8 billion in revenue, at the high end of guidance.

• Recurring revenue streams, including subscription and annualized recurring revenue, accounted for 57% of total revenue.

• Non-GAAP EPS of $0.91 exceeded guidance, driven by the highest non-GAAP gross margin in over 20 years.

• Product orders grew 20% year-over-year, up 9% organically, indicating normalizing demand.

• Enterprise product orders surged 33%, driven by strong performance in the Americas and EMEA.

• Service provider and cloud product orders grew 28%, with triple-digit growth in webscale.

• Public sector orders were up 2%, with strong growth in EMEA and APJC.

• Networking portfolio saw double-digit product order growth, with 3 consecutive quarters of double-digit growth in data center switching.

• Security orders more than doubled, driven by Splunk's advanced threat intelligence capabilities and Cisco's renewed security strategy.

• Collaboration product orders grew double digits, driven by demand for devices and the cloud Webex Suite.

• Observability orders were up high single digits, driven by network assurance solutions and Splunk Observability.

• Cisco is integrating Splunk, with updated data integrations and joint selling motions.

• AI is a significant focus, with Cisco positioned to capitalize on AI technology demand across three pillars: AI training infrastructure, AI network connectivity, and AI network inference and enterprise clouds.

• Cisco has announced new AI solutions, including an NVIDIA-based AI server and AI PODs, to help customers prepare for AI.

• Cisco is fusing AI capabilities into its products, such as Hypershield and Webex AI Agent.

• Strong order growth, margins, and non-GAAP EPS highlight Cisco's strong financial performance and strategic focus on AI and security.**

- Q1 Performance Overview: Total revenue was $13.8 billion, down 6% year-over-year, at the high end of guidance. Non-GAAP EPS was $0.91, exceeding guidance. Product revenue was $10.1 billion, down 9%, and service revenue was $3.7 billion, up 6%.

• Gross Margins: Non-GAAP total gross margin was 69.3%, up 220 basis points year-over-year, the highest in 20 years. Product gross margin was 68.9%, up 240 basis points, driven by Splunk, favorable product mix, productivity improvements, and a one-time duty drawback benefit. Services gross margin was 70.3%, up 130 basis points.

• Operating Margin: Non-GAAP operating margin was 34.1%, above guidance, reflecting strong profitability and financial discipline.

• Cash Flow and Capital Allocation: Operating cash flow was $3.7 billion, up 54%. Cisco returned $3.6 billion to shareholders through share repurchases and dividends.

• Recurring Metrics: Annualized Recurring Revenue (ARR) was $29.9 billion, up 22%. Total subscription revenue was $7.8 billion, representing 57% of total revenue. Total Remaining Performance Obligations (RPO) was $40 billion, up 15%.

• Product Orders: Total product orders were up 20% year-over-year, with organic growth of 9%. Geographic segments showed strong growth: Americas up 17%, EMEA up 26%, and APJC up 25%. Enterprise orders grew 33%, service provider and cloud orders grew 28%, and public sector orders grew 2%.

• Guidance for Q2 and FY25:

  • Q2: Revenue expected to be $13.75 billion to $13.95 billion. Non-GAAP gross margins expected to be 68% to 69%. Non-GAAP operating margin expected to be 33.5% to 34.5%. Non-GAAP EPS expected to be $0.89 to $0.91.
  • FY25: Revenue expected to be $55.3 billion to $56.3 billion. Non-GAAP EPS expected to be $3.60 to $3.66.

• Splunk Integration: Splunk integration is progressing well, with positive contributions to top-line and profitability. Joint products and data integrations are being developed, and sales motions are aligned.

• Cost Management: The team has been successful in driving cost out of the cost of goods sold, which is sustainable. The one-time duty drawback benefit will not repeat in subsequent quarters.

• Investments and Acquisitions: Cisco continues to invest in innovation and has closed two software acquisitions, DeepFactor and Robust Intelligence, to enhance security and AI capabilities. The company also announced the intent to acquire Deeper Insights AI to expand customer experience technology.