Insights, Analysis and more

Cisco Systems, a global leader in networking and IT solutions, recently released its financial results for Q4 and the fiscal year 2024 (FY24), showcasing a mix of achievements and challenges. Here’s an in-depth look at Cisco’s financial performance, operational highlights, and future outlook.

Cisco: History and Background

Cisco Systems, Inc., founded in 1984 by Leonard Bosack and Sandy Lerner from Stanford University, is a global leader in networking, telecommunications, and IT solutions. Created to improve communication between computers, Cisco revolutionized networking with its first multi-protocol router. The name “Cisco” pays homage to San Francisco, with its logo symbolizing the Golden Gate Bridge.

Growth and Expansion

Cisco went public in 1990, raising funds to expand its product portfolio and global reach. By the late 1990s, it became a cornerstone of the internet boom, providing critical networking infrastructure. Under the leadership of John Chambers (1995–2015), Cisco grew through strategic acquisitions and investments in emerging technologies. Chuck Robbins, the current CEO, has shifted the company’s focus to software, cybersecurity, and AI-driven solutions.

Key Innovations and Acquisitions

Cisco’s history includes significant acquisitions like:

• Duo Security (2018): Multi-factor authentication leader.
• AppDynamics (2017): Application performance monitoring.
• Splunk (2024): A $28 billion deal bolstering AI and analytics capabilities.

Cisco remains a pioneer in networking, from routers and switches to cloud and IoT solutions, while advancing in cybersecurity and collaboration tools like Webex.

Global Presence and Sustainability

Headquartered in San Jose, California, Cisco operates in over 100 countries, serving industries like healthcare, finance, and education. Its "Powering an Inclusive Future for All" campaign underscores its commitment to sustainability and digital inclusivity.

Recent Highlights

As of Q4 FY2024, Cisco reported $13.6 billion in revenue, driven by a 9% increase in software revenue and 15% growth in software subscriptions. Its annual recurring revenue (ARR) reached $29.6 billion, including $4.3 billion from Splunk, solidifying its transition to a software-driven model.

Cisco continues to lead the tech industry with innovative solutions and a focus on AI, cloud computing, and cybersecurity, adapting to meet the needs of an evolving digital world.

Key Financial Highlights

Q4 FY24 Results:

• Revenue: $13.6 billion, a 10% year-over-year decline.
• Net Income (GAAP): $2.2 billion, down 45%.
• Earnings Per Share (EPS):some text
  • GAAP: $0.54, a 44% decrease year-over-year.
  • Non-GAAP: $0.87, a 24% decrease year-over-year.
• Gross Margins:some text
  • GAAP: 64.4% (up from 64.1% in Q4 FY23).
  • Non-GAAP: 67.9% (up from 65.9% in Q4 FY23).

FY24 Results:

• Total Revenue: $53.8 billion, a 6% decline compared to FY23.
• Net Income (GAAP): $10.3 billion, an 18% decrease year-over-year.
• Earnings Per Share (EPS):some text
  • GAAP: $2.54, down 17%.
  • Non-GAAP: $3.73, down 4%.

Subscription and Software Growth:

• Total Subscription Revenue: $27.4 billion, representing 51% of total revenue.
• Software Revenue: $18.4 billion, up 9%.
• Annualized Recurring Revenue (ARR): $29.6 billion, including $4.3 billion from the Splunk acquisition, up 22%.

Factors Driving Performance

1. Subscription and Recurring Revenue: Cisco’s focus on subscription-based models has driven solid growth in software revenue and ARR. Software subscription revenue grew by 15% year-over-year, making up 89% of total software revenue.
2. Strong Growth in Security and Observability:some text
   • Security revenue increased 81% year-over-year, driven by heightened demand for cybersecurity solutions.
   • Observability, including contributions from Splunk, grew by 41%.
3. Geographic Revenue Distribution:some text
   • Americas: Down 11%.
   • EMEA: Down 11%.
   • APJC (Asia Pacific, Japan, and China): Down 6%.
4. Cost Management and Margins:some text
   • GAAP gross margins rose slightly to 64.7% for FY24, the highest in 20 years.
   • Non-GAAP operating margins were maintained at 32.5% in Q4, demonstrating operational discipline.

Challenges Impacting the Earnings of Cisco

Declining Networking Revenue: Networking revenue fell 28% in Q4 FY24 due to lower demand for traditional networking equipment like switches and routers.

Supply Chain Disruptions: The company faced delays in client equipment setups, impacting short-term sales.

Economic and Competitive Pressures:

• Rising competition in cloud and AI solutions from rivals like Microsoft and AWS.
• Challenges in the global economic environment, which slowed enterprise spending.

Splunk Acquisition Costs: The acquisition of Splunk, while adding value, impacted EPS negatively by $0.16 (GAAP) and $0.04 (Non-GAAP) in Q4.

Operational Highlights

1. Splunk Integration: Cisco’s acquisition of Splunk contributed $960 million to Q4 revenue and is expected to strengthen its position in cybersecurity and AI-powered analytics.
2. Innovation in Security and AI: Cisco is heavily investing in AI and security solutions, with recent launches aimed at improving digital protection and automation.
3. Cost Management: Operating expenses rose by 12% in Q4 due to increased marketing and personnel costs. However, the company managed a disciplined approach to protect margins.

Future Outlook of Cisco

Q1 FY25 Guidance:

• Revenue: Expected between $13.65 billion and $13.85 billion.
• Earnings Per Share (EPS):some text
  • GAAP: $0.35 to $0.42.
  • Non-GAAP: $0.86 to $0.88.

FY25 Guidance:

• Revenue: Expected between $55.0 billion to $56.2 billion.
• Earnings Per Share (EPS):some text
  • GAAP: $1.93 to $2.05.
  • Non-GAAP: $3.52 to $3.58.

Investor Insights

Cisco’s stock performance has faced challenges, with shares down 10% year-to-date compared to the Nasdaq’s 14% gain. However, the company’s focus on recurring revenue, coupled with strategic acquisitions like Splunk, offers long-term growth potential. Cisco also announced plans to return value to shareholders through dividends and share repurchases, with $3.6 billion returned in Q4 FY24.

Conclusion

Cisco’s FY24 results highlight the company’s resilience and adaptability amidst a challenging economic environment. While traditional networking revenue declined, growth in software subscriptions and cybersecurity solutions demonstrate Cisco’s strategic shift towards future-proof revenue streams. As the company continues to invest in AI, cloud, and security, its guidance for FY25 suggests a cautious yet optimistic outlook for sustainable growth.