Cisco Q1 FY 2024 Earnings

By Patrick Moorhead - November 20, 2023

The Six Five team discusses Cisco Q1 FY 2024 Earnings.

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Transcript:

Daniel Newman: All right, Pat, Cisco had a good quarter, but an interesting guide. What’s going on there?

Patrick Moorhead: Oh man, you just stole everything.

Daniel Newman: That was it. That was it. You want to go to the next topic?

Patrick Moorhead: No, no, no, we’re good. So Cisco had a phenomenal quarter. They beat by almost 8% on earnings. That’s a record. Highest gross margin in 17 years. They had a slight beat on the top line, almost 0.3%. By the way, that revenue number was a record and you would’ve expected the stock to just go nuts. Well, it tanked about 10% and it’s all about missing expectations on a Q2 guide. One of the first times that’s hit the revenue for the quarter, one of the first times in a long time that every single business unit was up, networking, security, heck observability up 21%, that’s a great thing to see as we get into this Splunk acquisition here. So this was all driven by a ThousandEyes and AppD. Collaboration been a long time, up 4%.

Super nice to see, driven off the back of calling and the contact center re-architectures, right? If there’s anything that can be improved, improving customer service through AI, it’s the contact center. Great progress on software, ARR and RPOs. You can read my analysis on LinkedIn and X, but all with the exception of ARR, which by the way is a huge number of 24.5 billion, everything else was double digits, software, subs, RPOs.

Now what happened with the guide? These are not Cisco words, these are Pat Moorhead and experience words, but it’s digestion in the field, which means I need all this hardware, I need more time to install all this hardware and therefore what are you going to do? Are you going to keep shipping it to them? No, the customers aren’t able to install and crank through all of this. So they’re going to pull back their orders a little bit. Not only direct but through the channel.

Final two interesting comments. An interesting nod to open AI networking. I need to do a little bit more research on that, at least what Cisco’s doing. But what we’re seeing is NVIDIA created its own called proprietary, it’s ethernet and also other variations, but really any type of NVIDIA networking that is connecting cards together or multiple clusters is not going to be Cisco networking and it’s not going to be Marvell and it’s not going to be Broadcom. So it looks like Cisco is getting into the game of more open AI network and my hope is that it’s going across multiple types of silicon. That it’s not only connecting cards, but it’s also connecting clusters, but it’s also connecting data centers in an open type of plane. There is a recent open networking, low latency standard that has come out. A couple of people have come out with that and I hope that it’s in support of that. Final thing, Splunk acquisition on track. Net-net, great quarter, challenging guide.

Daniel Newman: So goes to China to die in all serious, we’ll have to see how that goes. We’re still sitting here, I’m at the edge of my seat on this couch, still waiting to see if that VMware deal goes through. But anyways, that’s a completely different topic for another day. Cisco, Pat, you had a lot of great comments there. I’m going to just maybe add a couple of things. One is people don’t care about the current quarter if the guide isn’t good, except if the current quarter is bad, then they really care about it. But this was a great start. Record starts of the year. Record revenue, record profit, double-digit increase in software revenue, subscription increase by double digits. You mentioned a lot of this stuff. Solid ARR, the RPO looks good. We’ve sold a lot of stuff in advance of all this AI and that was kind of the moral of that story. A lot of stuff sold, now it has to be implemented.

Pat, what do I always say about if you want to sell the next project, you got to finish the current project. This is a problem of every single business and this is the problem that Cisco is having. It’s the AI system created a lot of buzz, drove a lot of revenue, now it’s a little bit of catch up and then forward you go. Bottom line, you adjust down once, they adjusted down somewhat precipitously here and now, I would think that with this kind of precipitous hit they’ve taken, they’ll have a chance to beat the rest of the way, which is good despite the fact that obviously it did see about a 5% drop or a little bit more than that in the name. Pat, I’m overall positive. I mean look, even WebEx grew, I mean you got to look at that as a win because that hadn’t happened in a long time.

Patrick Moorhead: That’s a good trough, yeah, that’s a good trough.

Daniel Newman: I’m strong on security. I’m strong in terms of my opinion of Cisco is strong on security, strong on observability. Network of course is core to the company, but it’s diversification in the software and the Splunk acquisition. I love the Splunk acquisition, I got to be candid. What a great deal for the company. It’s going to be good for Cisco.

Patrick Moorhead
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Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.