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Cisco Q2 2024: Security, Collaboration, and Observability Shine

Cisco Q2 2024: Security, Collaboration, and Observability Shine

The News: Cisco reported second quarter (Q2) results for the period ended January 27, 2024. The company reported Q2 revenue of $12.8 billion, net income on a generally accepted accounting principles (GAAP) basis of $2.6 billion or $0.65 per share, and non-GAAP net income of $3.5 billion or $0.87 per share. Read the earnings press release on the Cisco website.

Cisco Q2 2024: Security, Collaboration, and Observability Shine

Analyst Take: Cisco reported $12.8 billion in revenue, down 6% year-over-year (YoY), GAAP earnings per share (EPS) of $0.65, and non-GAAP EPS of $0.87, with revenue growth in security, collaboration, and observability providing silver lining contrast. Cisco CEO and chair, Chuck Robbins, observed that Cisco delivered strong operating leverage and capital returns, aligning the company’s investments to future growth opportunities. This includes driving an organization-wide innovation engine throughout an increasingly connected ecosystem that can play an integral role in how customers adopt AI and secure their organizations.

Cisco demonstrated progress on its business model transformation in Q2 FY 2024 consisting of:

  • Total software revenue was flat YoY and software subscription revenue was up 5% YoY.
  • Total annualized recurring revenue (ARR) at $24.7 billion, up 6% YoY, and product ARR up 9% YoY.
  • Remaining performance obligations (RPO) at $35.7 billion, up 12% YoY, and product RPO up 12% YoY.
Cisco Q2 2024: Security, Collaboration, and Observability Shine
Image Source: Cisco

Here are additional key Cisco Q2 FY 2024 figures by the numbers:

  • Gross Margin: On a GAAP basis, total gross margin, product gross margin, and service gross margin were 64.2%, 62.7%, and 68.2%, respectively, as compared with 62.0%, 60.2%, and 67.2%, respectively, in Q2 fiscal 2023. On a non-GAAP basis, total gross margin, product gross margin, and service gross margin were 66.7%, 65.2%, and 70.5%, respectively, as compared with 63.9%, 62.1%, and 69.1%, respectively, in Q2 fiscal 2023.
  • Operating Income: GAAP operating income was $3.1 billion, down 6%, with GAAP operating margin of 24.2%. Non-GAAP operating income was $4.2 billion, down 4%, with non-GAAP operating margin at 33.0%.
  • Net Income and EPS: On a GAAP basis, net income was $2.6 billion, a decrease of 5%, and EPS was $0.65, a decrease of 3%. On a non-GAAP basis, net income was $3.5 billion, a decrease of 3%, and EPS was $0.87, a decrease of 1%.
  • Cash and Cash Equivalents and Investments: $25.7 billion at the end of Q2 fiscal 2024, compared with $26.1 billion at the end of fiscal 2023.
Cisco Q2 2024: Security, Collaboration, and Observability Shine
Image Source: Cisco

Delving Deeper into Cisco’s Q2 2024 Earnings

On the plus side, 50% of Cisco total revenue is now recurring (i.e., subscription-based). We view this as marking an important milestone for the company, providing a strong indicator of long-term strength and revenue stability. The ongoing improvement in subscription rates links to enduring fiscal benefits such as better cash flow management, avoiding the unpredictability of one-off sales models, and can improve the accuracy of earnings forecasts as well as scaling business operations to better meet evolving opportunities.

The Q2 2024 revenue growth in security, collaboration, and observability aligns with Cisco’s subscription milestone, underscoring the solid performance. This is a major motivator in conducting the $28 billion acquisition of Splunk as the deal will add $4 billion of ARR to the Cisco books and make the deal accretive in the first year. We view the Splunk acquisition as a major shot in the arm for Cisco’s pivot away from lumpy hardware revenue to the smoother software recurring revenue model.

On the concern side, another softer outlook with a substantial revision down from expectation dampened investor enthusiasm. The market will like the noted reduction in headcount (i.e., 4,000+ workforce reduction) to maintain operational efficiency but concerns about growth can resurface.

From our view, the Cisco Live EMEA event in February 2024 showcased a strategic roadmap for navigating the complexities of cloud integration and advancing AI convergence. This included Cisco’s commitment to simplifying networking operations and enhancing security through cloud-centric strategies and advanced AI integration as well as prioritizing a tectonic shift in security cloud management, introducing Cisco Identity Intelligence and zero-trust network access frameworks to bolster authentication and threat detection.

Cisco also underscored its focus on full-stack observability and AIOps innovations, promising enhanced insights and responsiveness in digital experiences. Additionally, Outshift by Cisco unveiled Motific and Cloud App Security, signaling significant progress in generative AI deployment and cloud-native application security. Together, these presentations outlined Cisco’s vision for a transformative future, characterized by converged cloud solutions, AI-driven insights, and robust security measures.

AI Factors: Cisco EMEA Motific Launch and Microsoft Amitié Alliance

As part of Cisco Live EMEA, Cisco announced the preview launch of Motific, a SaaS product that helps organizations deploy trustworthy generative AI. An initiative born from Outshift, Cisco’s incubation business, Motific provides a centralized view across an organization’s generative AI, empowering IT and security teams to deliver generative AI across an organization with control over data, security, responsible AI, and cost.

Although there are challenges to AI management products, from our perspective, the demand and need for them will grow dramatically over the next year. These are the types of systems, along with other types of governance tools, that will help organizations tame generative AI risks and to use AI more responsibly.

Also, in February 2024, Cisco announced its collaboration with Microsoft in completing their 800Gbps transmission trial on the Amitié transatlantic cable. The partnership targets supporting the exponential growth in AI and cloud services that require increased subsea network capacity to boost overall network performance.

Security Factors: Cisco Security Cloud Updates

Security Cloud is Cisco’s overarching umbrella that provides AI-driven and cross-domain security. With its most recent updates, Cisco is bolstering its identity intelligence and control capabilities—in large part to support the move away from network-centric and perimeter-based security models in favor of a zero trust approach that is centered on identities.

Cisco Identity Intelligence intends to bridge authentication and access with greater visibility and control. The offering will run on top of customers’ third-party identity stores to provide centralized visibility and value-add, AI-based analytics. It will tap Cisco’s range of network visibility, extended detection and response (XDR) orchestration, and Secure Access and Duo access capabilities. We find that Cisco Identity Intelligence represents a step forward in securing the complex landscape of digital identities. By integrating with existing infrastructure and leveraging AI-powered analytics, it empowers organizations to clean up vulnerabilities, manage permissions effectively, and detect threats proactively.

Cisco Meraki Powers T-Mobile’s Connected Workplace Advantages to Midsize Businesses

In January 2024, T-Mobile and Cisco united to debut T-Mobile’s Connected Workplace service aimed primarily at midsize businesses. The union combines the Cisco Meraki networking solution with T-Mobile’s managed services to provide 5G business Internet with built-in security assurances and streamlined networking capabilities, particularly throughout retail store and branch environments.

We view Cisco Meraki network technologies as vital to enabling T-Mobile’s Connected Workplace to streamline the network infrastructure of midsize businesses, which is key to minimizing IT and operational complexity on a comprehensively secure and cost-effective foundation. This is a tribute to Cisco Meraki developing solutions specifically for midsize organizations, which ensures T-Mobile can set up devices on a plug-and-play basis that significantly ease adoption.

Cisco Q2 Fiscal 2024: Guidance

As foreground, Cisco saw a slowdown in new product orders during Q1 of fiscal 2024 and believes the primary reason is that customers are currently focused on installing and implementing products in their environments following exceptionally strong product delivery over the past three quarters. Now Cisco is seeing higher degrees of caution and scrutiny of deals attributed primarily to macro concerns (e.g., inflation), prompting Cisco to be more cautious about its fiscal H2 2024 and softening guidance.

Cisco observed that customers are taking longer to deploy the products already shipped, linking to delays across inventory reductions. Plus, Cisco is dealing with weak demand across the operator space, although its wireless products are further along in their respective deployment and inventory stages, setting the stage for the expectation of deployment enlargement throughout 2024.

Cisco Q2 2024: Key Takeaways

Overall, we find that Cisco’s improving subscription-based revenue trend provides a positive framework for Cisco to successfully address the inventory adjustments and heightened customer caution amid macro concerns that resulted in the dial back of guidance. The positive Q2 2024 revenue growth across security, collaboration, and observability and the impending closure of the Splunk deal reinforce the greater role that the subscription-based model will play in framing Cisco’s overall revenue picture. This can indicate stronger periods to come for Cisco, especially in balancing against macro considerations such as inflationary concerns, geopolitical uncertainties, and the transformative impact that AI poses for the tech sector and the overall economy.

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 Q1 2024: AI, Security, Cloud, and Observability Fuel Results

T-Mobile Enlists Cisco Meraki to Launch Connected Workplace

Comprehensive Analyst Coverage of Cisco Live EMEA

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.

Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.

From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.

A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.

An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.

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