Analyst(s): Ron Westfall
Publication Date: November 18, 2024
Cisco’s Q1 FY2025 earnings report reveals a mixed performance, with $13.8 billion in revenue, down 6% year-over-year. While the Networking segment faced significant declines, robust growth in Security and Observability, fueled by strategic acquisitions and AI-driven solutions, showcased Cisco’s adaptability. Solid margins and increased cash flow underscore Cisco’s operational discipline amid market uncertainties.
What is Covered in this Article:
- Overview of Cisco’s Q1 FY2025 financial performance.
- Key growth drivers, including Security and Observability segments.
- Challenges faced by the Networking and Collaboration segments.
- Strategic investments in AI, security, and acquisitions.
- Analyst insights into Cisco’s earnings and future outlook.
The News: Cisco Systems, Inc. reported revenue of $13.8 billion for Q1 FY2025, indicating a 6% decrease compared to the previous year. Despite struggles in its Networking segment, Cisco accomplished 100% growth in Security and 36% growth in Observability, driven by its integration of Splunk and investments in artificial intelligence and cybersecurity. The company reported healthy GAAP gross margins of 65.9% and a year-over-year rise in operational cash flow of 54%, reaching $3.7 billion.
Cisco Q1 FY2025 Earnings: Security and AI Drive Growth Amid Networking Challenges
Analyst Take: Cisco’s Q1 FY2025 earnings show a company in transition, balancing issues in legacy networking products with major advances in high-growth sectors such as security and observability. The 6% year-over-year sales loss reflects the pressures of shifting IT investment priorities and rising competition, particularly in the Networking category, which experienced a 23% drop in revenue.
However, Cisco’s strong performance in the Security (100% growth) and Observability (36% growth) divisions demonstrates its ability to pivot toward emerging technologies such as AI and cybersecurity effectively. These areas have been strengthened by strategic acquisitions such as Splunk and the introduction of cloud-native technologies such as SecureX, which cater to enterprise visibility and threat management requirements in increasingly complex digital environments.
Despite geographical headwinds, particularly in the Americas, where sales decreased by 9%, Cisco displayed operational resilience. Its strong margins (GAAP gross margin of 65.9%) and 54% rise in operational cash flow result from careful cost control and targeted investments.
The company’s focus on AI-ready infrastructure and hybrid-cloud solutions positions it well to capitalize on future prospects. However, problems in its Networking and Collaboration divisions highlight the need for ongoing innovation and portfolio development dexterity. Overall, Cisco’s agility and strategic focus on high-growth technologies indicate cautious optimism for the coming quarters. Still, success will depend on its ability to handle falling legacy areas while maintaining momentum in its growth drivers.
Financial Highlights: A Balanced Approach to Revenue and Margins
Cisco’s Q1 FY2025 financial results demonstrated its capacity to sustain strong operational efficiency despite a 6% decrease in revenue to $13.8 billion. This decline indicates difficulties in traditional product lines, especially within the Networking sector. Nonetheless, Cisco mitigated some of these challenges through substantial growth in its high-margin services sector, which rose by 6% year-over-year. The company’s cash flow from operating activities increased by 54% to $3.7 billion, highlighting effective cost management and enhanced operational leverage. This represents a notable enhancement from the $2.4 billion documented in Q1 FY2024.
Cisco attained GAAP gross margins of 65.9% and non-GAAP gross margins of 69.3%, reflecting enhancements over the prior year, driven by effective pricing and supply chain efficiencies. The corporation distributed $3.6 billion to shareholders through dividends and share repurchases, illustrating its dedication to shareholder value. Cisco possesses cash reserves of $18.7 billion, enabling it to exercise the financial flexibility needed to invest in developing technologies, pursue strategic acquisitions, and sustain its competitive market position in critical growth sectors. These highlights emphasize Cisco’s resilience in the face of macroeconomic risks and its commitment to generating long-term value.
Security and Observability: Growth Anchored in Strategic Priorities
Cisco’s Security segment emerged as a standout performer in Q1 FY2025, growing a remarkable 100% year-over-year. This growth was primarily driven by integrating Splunk’s cybersecurity and observability tools. Splunk’s advanced log management and threat detection capabilities bolstered Cisco’s broader portfolio, enhancing its position as a leader in enterprise security.
The SecureX platform, Cisco’s flagship cloud-native security management solution, also contributed to this success by streamlining threat response across enterprise ecosystems. Recent acquisitions such as DeepFactor, Inc. and Robust Intelligence, Inc. further strengthened Cisco’s application security and AI-based threat detection capabilities, addressing customers’ evolving needs and navigating digital transformation.
In tandem, the Observability segment posted an impressive 36% growth, reflecting increasing demand for visibility across hybrid and multi-cloud environments. Cisco’s AppDynamics platform, a top-tier competitor in the application performance monitoring segment, proved pivotal in helping enterprises optimize operational efficiency and improve user experiences. With observability becoming a key enabler for business agility, Cisco’s focus on integrated solutions positions it to drive long-term growth and improve its business outcomes.
Networking: An Evolving Segment Faces Decline
Cisco’s Networking segment, the traditional backbone of its product portfolio, faced significant challenges in Q1 FY2025, with revenue falling 23% year-over-year. This decline highlights shifting enterprise spending priorities as organizations reallocate budgets from traditional networking solutions to higher priority technologies such as AI and cybersecurity.
Despite the challenges, Cisco’s innovation in networking continues. The company’s Catalyst 9000 series switches and Wi-Fi 6E solutions remain integral for enterprises undergoing digital transformation. Additionally, its work in private 5G networks provides scalable connectivity solutions for industries like manufacturing and logistics. While these efforts underline Cisco’s commitment to its legacy segment, the competition from alternative technologies and providers is creating headwinds.
The decline in Networking underscores a broader industry shift, signaling the need for Cisco to prioritize emerging opportunities and modernize its traditional offerings. As enterprises increasingly adopt cloud-first strategies, Cisco must navigate this transition to maintain relevance in its core segment.
Cisco Ups the AI Ante Launching New Plug-and-Play Solutions with NVIDIA
At the 2024 Cisco Partner Summit, Cisco unveiled Plug-and-Play use cases and industry-specific AI PODs aimed at making it easier for partners to sell and customers to deploy AI infrastructure. Cisco’s new offerings equip customers with essential infrastructure components to enhance their AI adoption, regardless of their current capabilities. These advancements build upon existing systems, allowing organizations to expand and innovate while minimizing complexity. Managed through Cisco Intersight, these solutions facilitate centralized control and automation, streamlining processes from configuration to daily operations.
Cisco is expanding its UCS AI compute lineup with the introduction of the UCS C885A M8 servers, specifically engineered for AI workloads that require intensive GPU usage. These powerful, high-density servers are designed to handle the most challenging AI training and inference tasks, using the capabilities of NVIDIA’s HGX supercomputing platform equipped with NVIDIA H100 and H200 Tensor Core GPUs.
To enhance AI networking performance, each server is outfitted with NVIDIA NICs or SuperNICs, while NVIDIA BlueField-3 DPUs are incorporated to boost GPU data access and implement robust, zero-trust security measures. This release marks Cisco’s inaugural venture into the dedicated AI server market and represents the company’s first eight-way accelerated computing system constructed on the NVIDIA HGX platform.
Moreover, Cisco’s new AI PODs offer a comprehensive approach for organizations looking to implement AI infrastructure. These pre-configured stacks combine compute, networking, storage, and cloud management components, optimized for specific AI applications and industries. Based on Cisco Validated Designs, the AI PODs provide a reliable foundation that can be customized to meet unique requirements. AI PODs can simplify the deployment of AI inference solutions according to customer scaling needs, from edge computing to large-scale clusters powered by NVIDIA accelerators.
From my view the new AI-centric Cisco Plug and Play offering directly addresses the increasing pressure enterprise customers are experiencing to implement AI workloads, particularly to take advantage of the transition to agentic workflows and AI’s ability to autonomously address top business and technical priorities. Cisco’s advancements, including AI PODs and GPU servers, are solidly positioned to enhance the security, compliance, and processing capabilities of workloads as customers progress through their AI journeys from inferencing to training.
Regional Revenue Trends: A Mixed Performance Across Geographies
Geographically, Cisco’s performance varied, reflecting different economic and market dynamics. The Americas region, which accounts for the largest revenue share, saw a 9% decline, highlighting tightening IT budgets and macroeconomic challenges. In contrast, the EMEA region demonstrated resilience, with only a 2% decline, buoyed by stable enterprise spending. Meanwhile, the APJC region achieved a modest 1% growth, driven by consistent demand in emerging markets.
These regional trends underscore Cisco’s efforts to adapt its strategy to local market conditions. In APJC, for instance, Cisco’s multi-cloud networking solutions, which simplify connectivity across cloud platforms, have been well-received, particularly as businesses in the region prioritize digital transformation. By contrast, the decline in the Americas highlights the need for a sharper focus on customer engagement and tailored solutions, such as the AI-centric Plug-and-Play use cases and industry-specific AI PODs, in the face of economic headwinds.
Strategic Investments and Innovation: Building for the Future
Cisco’s investments in R&D and strategic acquisitions reflect its focus on emerging technologies. The company’s acquisitions of Splunk, DeepFactor, and Robust Intelligence underscore its commitment to addressing the growing demand for cybersecurity and AI-driven solutions. These additions enhance Cisco’s ability to provide end-to-end security and observability solutions, meeting the needs of enterprises grappling with complex digital ecosystems.
Innovation remains at the heart of Cisco’s strategy, as evidenced by its advancements in Quantum Networking and network-as-a-service (NaaS) platforms. These technologies aim to redefine the connectivity landscape, offering businesses greater flexibility and scalability. By focusing on these cutting-edge areas, Cisco is positioning itself for long-term growth.
Outlook: Balancing Risks and Opportunities
Cisco’s Q1 FY2025 results reflect its ability to navigate a complex environment, leveraging innovation and strategic investments to counterbalance challenges in legacy segments. The company’s strong performance in Security and Observability, bolstered by acquisitions and AI-driven solutions, positions it as a key player in the future of IT infrastructure. While obstacles remain, Cisco’s focus on aligning its portfolio with evolving customer needs ensures it remains a resilient and adaptive enterprise in a rapidly changing market.
For Q2 FY2025, Cisco projects revenue between $13.75 billion and $13.95 billion, with non-GAAP EPS expected to range from $0.89 to $0.91. The company’s full-year revenue guidance of $55.3 billion to $56.3 billion reflects cautious optimism, driven by AI, security, and multi-cloud solutions growth.
However, challenges remain. The decline in the Networking segment and regional pressures in the Americas highlight areas that require focused attention. At the same time, the robust growth in Security and Observability, coupled with strong margins, underscores Cisco’s ability to capitalize on emerging opportunities.
Click this link to view the complete press release of Cisco Q1 FY2025 earnings on the Cisco website.
Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discusses Cisco’s earnings in their latest episode. Check it out here and be sure to subscribe to The Six Five Webcast so you never miss an episode.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other insights from The Futurum Group:
Cisco Q4 & FY 2024: Focus on AI, Security, and Cloud
Cisco Ups the AI Ante Launching New Plug-and-Play Solutions with NVIDIA
Author Information
Ron is an experienced, customer-focused research expert and analyst, with over 20 years of experience in the digital and IT transformation markets, working with businesses to drive consistent revenue and sales growth.
He is a recognized authority at tracking the evolution of and identifying the key disruptive trends within the service enablement ecosystem, including a wide range of topics across software and services, infrastructure, 5G communications, Internet of Things (IoT), Artificial Intelligence (AI), analytics, security, cloud computing, revenue management, and regulatory issues.
Prior to his work with The Futurum Group, Ron worked with GlobalData Technology creating syndicated and custom research across a wide variety of technical fields. His work with Current Analysis focused on the broadband and service provider infrastructure markets.
Ron holds a Master of Arts in Public Policy from University of Nevada — Las Vegas and a Bachelor of Arts in political science/government from William and Mary.
