- Cisco shares fell on Thursday after the IT networking giant reported results for its second fiscal quarter and slashed its full-year guidance.
- The company cited macro uncertainty, ongoing customer inventory rebalancing, and weakness in certain markets.
- Despite the cut, some investors will see this as a necessary reset as the guidance looks very conservative and achievable.
Cisco Systems (NASDAQ: CSCO) reported a solid set of second-quarter earnings, however, its shares dropped about 5% after the IT giant offered a softer-than-expected outlook for the current quarter and slashed the full-year guidance.
How Did Cisco Perform in FQ2
For its second fiscal quarter, Cisco reported a net income at $2.6 billion, which equals 65 cents per share. On an adjusted basis, the company earned 87 cents, slightly lower than the 88 cents per share reported in the same period last year but higher than the consensus of 84 cents.
Revenue was $12.8 billion, down from $13.6 billion a year ago and down 6% year-over-year. Analysts had anticipated revenue of $12.71 billion, according to FactSet.
The Product business saw a decline on an annual basis, reaching $9.23 billion, while Service sales slightly increased to $3.56 billion. Analysts had expected total product revenue to reach $9.3 billion.
"We delivered a solid second quarter with strong operating leverage and capital returns," said Chuck Robbins, chair and CEO of Cisco.
For the fiscal third quarter, Cisco executives guided adjusted earnings in the range of 84 cents to 86 cents per share and revenue between $12.1 billion and $12.3 billion.
Analysts, however, had forecast adjusted earnings of 92 cents per share and revenue of $13.1 billion.
For the full year, the company is looking for adjusted earnings per share of $3.71 (up or down 3 cents) on revenue of $52 billion (up or down $500 million). Analysts had expected a profit per share of $3.86 on sales of $54.3 billion.
The new guidance marks a lowered outlook compared to the prior quarter when Cisco said it expects full-year adjusted EPS of $3.90 on revenue of $54.4 billion, both at the midpoint of the guidance.
Total software revenue remained steady compared to the previous year, while software subscription revenue experienced a 5% increase YoY.
The total annualized recurring revenue (ARR) reached $24.7 billion, an important financial metric for tech companies, marking a 6% rise from the previous year, with product ARR showing a 9% increase.
Remaining performance obligations (RPO) also saw substantial growth, reaching $35.7 billion, a 12% increase YoY, with product RPO witnessing similar growth at 12%.
On an adjusted basis, the total gross margin, product gross margin, and service gross margin stood at 66.7%, 65.2%, and 70.5%, respectively, compared to 63.9%, 62.1%, and 69.1% in the second quarter of fiscal 2023.
Total gross margins varied by geographic segment: 65.7% for the Americas, 68.1% for EMEA, and 68.2% for APJC, Cisco said.
Cash Flow totaled $0.8 billion for the second quarter of fiscal 2024, marking a substantial 83% decrease from $4.7 billion in the second quarter of fiscal 2023.
Cash and Cash Equivalents and Investments amounted to $25.7 billion at the end of the second quarter of fiscal 2024, down from $26.1 billion at the end of fiscal 2023.
Elsewhere, the company announced a 3% increase in dividends, raising the payout to $0.40 per share. During the second quarter of fiscal 2024, $2.8 billion was returned to stockholders through share buybacks and dividends.
The remaining authorized amount for stock repurchases under the program stands at $8.4 billion, the company said in a press release.
Adjusting Workforce Numbers as Sales Declines
Cisco also announced plans to reduce its workforce by 5% on Wednesday, resulting in the elimination of approximately 4,250 jobs. Speaking on the earnings call, the management estimated pre-tax charges of approximately $800 million associated with layoffs. Discussing the layoffs, Robbins 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."
The tech industry has been undergoing downsizing in 2024, with companies striving to reduce costs in the wake of the market downturn two years ago. January saw a surge in job cuts across the industry, with companies like Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and SAP all announcing layoffs, along with eBay (NASDAQ:EBAY), Unity, and Discord.
Similarly, CFO Scott Herren said that the company remains focused on “execution and operating discipline.”
"We are making good progress in our business model shift to more recurring revenue while remaining focused on financial discipline, operating leverage and shareholder returns, as evidenced by our increased dividend."
Nvidia Partnership
In the meantime, Cisco continues to push on the artificial intelligence (AI) front. During the last quarter, the company announced several new capabilities across its security, collaboration, and observability portfolios, incorporating AI throughout.
“While there is tremendous opportunity ahead, we are still in the early stages of adoption of AI workloads,” Robbins said.
The management said on the call that it continues to seize the multibillion-dollar opportunity presented by AI infrastructure.
The next phase of the company's partnership with NVIDIA (NASDAQ:NVDA) was unveiled, aimed at providing enterprises with simplified cloud-based and on-premises AI infrastructure solutions.
These solutions encompass both networking hardware and software designed to support advanced AI workloads.
The company is a clear beneficiary of the widespread adoption of AI, and its partnership with NVIDIA shows the important role it occupies within the AI and broader technology ecosystem.
In the realm of web-scale, the company is witnessing continued momentum, with three of the top four customers implementing its hyper scale Ethernet AI fabric.
This is achieved by leveraging Cisco-validated designs for AI infrastructure, further evidencing the company's significant contributions to the advancement of AI infrastructure solutions.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.