Cisco Systems, Inc. (NASDAQ: $CSCO) is a global leader in networking technologies best known for its networking equipment. Based in San Jose, CA, Cisco Systems was founded in 1984. With over 75,000 employees worldwide, Cisco dominates the market for network switches, routers, and other key infrastructure for enterprise networks and the Internet.
On Wednesday, February 14, Cisco released its second quarter fiscal 2024 earnings results, underscoring its ability to maintain profit margins despite lower revenues. The tech heavyweight is adapting its business to navigate macroeconomic headwinds while progressing with the evolution of its business model.
Revenue Falls 6%, But Key Areas See Growth
Cisco’s total revenue for the quarter was $12.8 billion, down 6% compared to the same quarter last year, but above above estimates of $12.71 billion. Product revenue declined by 9%, while service revenue grew by 4%.
Broken down by region, revenue declined in all regions; it fell 4% in the Americas, declined by 7% in the Europe, Middle East, and Africa (EMEA) region, and dropped 12% in the Asia Pacific, Japan, and China (APJC) region.
By product category, Security grew by 3%, Collaboration was up by 3%, and Observability rose by 16%, while Networking revenue fell 12%.
Commenting on the result, Cisco CEO, Chuck Robbins, said they had a strong second quarter with strong capital returns, and operating leverage.
He added “We continue to align our investments to future growth opportunities. Our innovation sits at the center of an increasingly connected ecosystem and will play a critical role as our customers adopt AI and secure their organizations.”
Cisco Sustain Profitability Despite Headwinds
Despite the top-line headwinds, Cisco delivered strong profitability through focused execution and cost management.
On a GAAP basis, gross margin improved 230 basis points to 64.2%. Non-GAAP gross margin expanded 280 basis points to 66.7%. Operating margin also expanded to 24.2%, with the non-GAAP operating margin up 60 basis points to 33.0%.
Cisco’s operating expenses were flat at $5.1 billion on a GAAP basis. Non-GAAP operating expenses rose only 1% to $4.3 billion. Non-GAAP operating expenses declined from 35.6% to 33.8% as a percentage of revenue.
Cisco Systems Earnings Top Estimates
Powerful operating leverage drove better-than-expected earnings. GAAP EPS declined 3% to $0.65 but beat estimates by $0.02. Non-GAAP EPS declined just 1% to $0.87, exceeding consensus estimate of $0.84.
Operating cash flow for the quarter was $0.8 billion, down 83% Y/Y. However, the company returned $2.8 billion to shareholders through dividends and buybacks. Cisco repurchased 25 million shares for $1.3 billion in Q2. The company has $8.4 billion remaining in its authorization for future buybacks.
In addition, Cisco increased its quarterly dividend payment by 1 cent or 3% to $0.40 per share. This marks the 11th year in a row Cisco has raised its dividend.
Cisco Faces Stock Decline Amidst Challenges
Cisco’s share price is trading at $49.00, a 2.55% drop compared to the previous close of $50.28, as of 9:52 am on February 15th. Over the past year, Cisco’s stock price has declined by 1.39%, contrasting with the 22.25% increase in the S&P 500 index over the same period.
Cisco’s current share price is above its 52-week low of $45.56 and is lower than its 50-day and 200-day moving averages. With 4.06 billion shares outstanding, Cisco has a market capitalization of $201.71 billion today.
Guidance Reflects Macro Uncertainty
For Q3 fiscal 2024, Cisco anticipates revenue growth from $12.1 billion to $12.3 billion. Projected earnings per share for this period are expected to range between $0.51 and $0.56 under GAAP and $0.84 to $0.86 under non-GAAP. The revenue and non-GAAP EPS forecast came below analysts’s estimates of $13.1 billion, and $0.92 respectively.
The company has adjusted its full-year outlook with anticipated revenue between $51.5 billion and $52.5 billion. Projected earnings per share range from $2.61 to $2.73 (GAAP) and $3.68 to $3.74 (non-GAAP). Analysts had forecast revenue of $54.3 billion, and non-GAAP EPS of $3.86 for the full year.
Restructuring Announced to Accelerate Innovation Focus
In the earnings release, Cisco unveiled a restructuring plan to accelerate its innovation agenda. The company plans to retrench about 5% of its global workforce, representing approximately 4,100 employees.
By trimming payrolls, companies aim to lift margins in the face of uncertain demand. Cisco’s previous round of layoffs helped drive a 280 basis point increase in gross margins last quarter. The company also posted stronger-than-expected earnings.
Cisco says the latest restructuring will result in around $800 million in pre-tax charges. However, it hopes to maximize long-term shareholder value through disciplined expense management.
Financial Discipline Drives Strength
Cisco ended the quarter with a healthy balance sheet and liquidity position. Cash and investments totaled $25.7 billion, providing financial flexibility. Deferred revenue grew 8% to $25.8 billion as Cisco’s subscription transition continues. The remaining performance obligations also increased by 12%, reflecting the greater revenue visibility.
Despite the muted top-line outlook, the company expects to deliver strong free cash flow and earnings growth for the fiscal year. Ongoing discipline will help maintain profitability and balance sheet strength.
Analysts Cautious on Cisco Despite Strong Cash Flow Outlook
Cisco’s revenue declined 6% year-over-year due to macroeconomic headwinds, but the company exceeded earnings estimates through cost control and operational efficiency. Key growth areas like Security and Collaboration rose, showing Cisco is adapting its business. A restructuring plan was announced to accelerate innovation. Cisco provided cautious guidance but expects strong cash flow through financial discipline.
Cisco’s stock has received mixed opinions from analysts recently. Out of 16 total analysts, 13 recommend holding the stock, while only 3 advise buying. Over the past 3 months, analysts’ average 12-month price target has been $52.54. This represents a potential 7.38% upside from the current share price of $48.93. The bullish price forecast is $55.00, compared to the most bearish target of $46.00.
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