The News: Cisco reported third quarter (Q3) results for the period ended April 27, 2024. The company reported Q3 revenue of $12.7 billion, net income on a generally accepted accounting principles (GAAP) basis of $1.9 billion or $0.46 per share, and non-GAAP net income of $3.6 billion or $0.88 per share. Read the earnings press release on the Cisco website.
Cisco Q3 2024: Networking, Security, Observability, and Data Wax
Analyst Take: Cisco reported $12.7 billion in revenue, down 13% year-over-year (YoY), net income on a GAAP basis of $1.9 billion or $0.46 per share, and non-GAAP net income of $3.6 billion or $0.88 per share. Splunk contributed $413 million of total revenue for Q3 fiscal 2024. The results were in line with expectations, reflecting Cisco’s customers’ continued implementation of products on-hand. Chuck Robbins, chair and CEO of Cisco, spotlighted that portfolio synergies across networking, security, observability, and data underpinned a solid Q3 outcome.
Revenue, gross margin, and non-GAAP EPS in Q3 were at the high end or above its guidance range, both including and excluding Splunk, resulting in continued operating leverage. Cisco emphasized that customers are consuming the equipment shipped over the last few quarters in line with expectations resulting in stabilization of demand as a result. Cisco identified the addition of Splunk to its product line as a catalyst for further growth. Also, Cisco named Gary Steele as President of Go-to-Market, continuing to lead the Splunk team through the integration process to help ensure uninterrupted integration into Cisco.
Cisco showed progress on its business model transformation, further bolstered by the Splunk acquisition. Key Q3 FY 2024 takeaways included:
- Total software revenue of $6.9 billion including Splunk, representing 54% of total revenue
- Total annualized recurring revenue (ARR) at $29.2 billion including $4.2 billion from Splunk, up 22% YoY, and product ARR at $15.5 billion, up 44% YoY
- Strong profitability with GAAP gross margin of 65.1% and non-GAAP gross margin of 68.3%
Here are additional key Cisco Q3 FY 2024 figures by the numbers:
- Gross Margin. On a GAAP basis, total gross margin, product gross margin, and service gross margin were 65.1%, 63.5%, and 69.2%, respectively, as compared with 63.4%, 62.7%, and 65.4%, respectively, in Q3 of fiscal 2023.
- Operating Income: GAAP operating income was $2.2 billion, down 44%, with GAAP operating margin of 17.2%. Non-GAAP operating income was $4.3 billion, down 12%, with non-GAAP operating margin at 34.2%.
- Net Income and EPS: On a GAAP basis, net income was $1.9 billion, and EPS was $0.46, each a decrease of 41%. On a non-GAAP basis, net income was $3.6 billion, a decrease of 14%, and EPS was $0.88, a decrease of 12%.
Balance sheet and other financial highlights:
- Cash and Cash Equivalents and Investments: $18.8 billion at the end of Q3 fiscal 2024, compared with $26.1 billion at the end of fiscal 2023.
- Remaining Performance Obligations (RPO): $38.8 billion, up 21% in total, with 52% of this amount to be recognized as revenue over the next 12 months. Product RPO were up 29% and service RPO were up 14%.
Diving Deeper into Cisco’s Q3 2024 Earnings
On the plus side, Cisco posted a double earnings beat for the quarter with EPS of $0.88 versus $0.82 estimate, sales of $12.7 billion versus $12.53B estimates. In the quarter, Cisco completed its $28 billion acquisition of Splunk. While the deal lowered Cisco’s adjusted EPS by $0.01, it did provide $413 million in additional revenue. Cisco identifies 5,000 existing customers that have the potential to become Splunk customers, resulting in broader sales opportunities and in cost reductions over time.
AI Factors: NVIDIA Alliance and Hypershield Debut Boost AI Ecosystem Credentials
Cisco and NVIDIA are collaborating to offer enterprises cloud-based and on-premises AI infrastructure, networking, and software solutions, including infrastructure management, secure AI infrastructure, observable AI solutions, and access to NVIDIA AI Everywhere software that supports the building and deployment of advanced AI and generative AI workloads.
Cisco and NVIDIA are adroitly addressing growing enterprise demand for integrated AI networking and AI hosting solutions. The key driver is that enterprises are fundamentally committed to avoiding putting their intellectual property (IP) and mission-critical data onto cloud-based public AI models. To protect their data without compromise, enterprises are prioritizing the hosting of AI workloads, integral to their AI infrastructure builds.
Also, Cisco’s introduction of Hypershield provides a security architecture that uses AI to provide distributed and adaptive security measures for applications, devices, and data across on- and off-premises data centers. Hypershield is distributed in nature. It uses “enforcement points,” which act like micro-firewalls and run on a server or in data processing units ([DPUs] which offload data processing from the CPU) that are installed on servers or networking hardware. In other words, they make security enforcement possible in software, virtual machines, and network and server systems.
Cisco, joined by Accenture, Eightfold, Google, IBM, Indeed, Intel, Microsoft, and SAP, along with six advisors, unveiled the launch of the AI-Enabled Information and Communication Technology (ICT) Workforce Consortium. The Consortium is focused on upskilling and reskilling roles most likely to be impacted by AI and is catalyzed by the work of the US-EU Trade and Technology Council (TTC) Talent for Growth Task Force, with the goal of exploring AI’s impact on ICT job roles, assisting workers to find and access relevant training programs, and connecting businesses to skilled and job-ready workers.
Observability Factors: Cisco AppDynamics Updates
We find that the introduction of Cisco’s AppDynamics Flex licensing model provides another option for developers and their approach to observability solutions. This licensing strategy allows organizations to switch between self-hosted and SaaS products, in line with their changing needs and objectives for digital transformation. Developers may have increased flexibility and agility to adjust their observability architecture to meet evolving workload requirements and compliance constraints. Cisco aims to enable developers to future-proof their monitoring strategies and drive innovation confidently by offering the flexibility to switch between deployment types without sacrificing functionality or performance.
Moving forward, we may anticipate a greater focus on hybrid observability strategies, wherein organizations use a blend of self-hosted and cloud-based solutions to enhance performance, security, and compliance. Future innovation and customer flexibility depend on vendors who are proactive in identifying and responding to market changes, as Cisco has demonstrated with AppDynamics Flex. Developers and IT teams may enjoy advantages in terms of increased options and flexibility when choosing observability solutions that match their specific needs.
Cisco Uplifts Broadband Economics and Helps Debut Innovation Centers for Private 5G
Cisco Routed PON debuts as an integral part of Cisco’s mission to transform the economics of networking for the benefit of communications service providers (CSPs) and communities globally. Routed PON is designed to significantly improve the cost of broadband deployment across rural, suburban, and urban areas, to assist in expanding the delivery of high-performance, higher bandwidth connectivity to business and residential customers, especially as broadband services scale to support bandwidth-intensive applications such as AI and generative AI workloads.
Plus, Cisco and Intel are adeptly addressing growing enterprise demand for decreasing risk, cost, and complexity in the adoption of private 5G by delivering a sandbox environment to test early private 5G, validate proof-of-concept, and evaluate customized solutions ahead of full production rollouts. Cisco partners and other vendors who visit an innovation center will be able to validate their 5G end devices and demo systems with Cisco’s Mobility Services Platform and Intel Mobile Edge Computing applications. Multiple RAN vendors have also partnered with Cisco to realize private 5G use cases for real-world applications.
Now customers can test their end devices, RAN, and applications with an array of existing end-to-end private 5G use cases including anomaly detection, autonomous retail, video surveillance, remote assist and work instructions, and Webex Expert on Demand. Specifically, for video surveillance, Cisco has integrated support for the General Mobile 5G IP Camera, powered by Fii (Foxconn Industrial Internet), enabling ultra-high-definition video surveillance in real time. This is supported by advanced analytics for use cases such as smart cities, perimeter security, and commercial outdoor environments. With LTE/5G NR support, this camera is designed to ensure low latency, high bandwidth, and reliable video transmission, making it a more cost-effective choice for private network and MEC applications.
Cisco Q4 FY 2024 and FY 2024 Guidance
Cisco Q4 FY 2024 guidance included revenue in the $13.4 billion to $13.6 billion range versus $13.23 billion estimate alongside EPS GAAP in the $0.46 to $0.51 range and EPS Non-GAAP in the $0.84 to $0.86 range. Plus, Cisco bumped up its fiscal 2024 revenue guidance to a range of $53.6 billion to $53.8 billion, from $51.5 billion to $52.5 billion in February. The raise in guidance, in combination with Q3 revenue exceeding analyst expectations, provided cheer in the investor community an afterhours bump in Cisco’s share price.
Cisco Q3 2024: Key Takeaways
Overall, we find that Cisco’s progress with the integration of Splunk and the harnessing of portfolio synergies in the networking, security, observability, and data domains provides a positive framework for the company to successfully navigate the process of customer implementation for products on-hand as well as capitalize on AI market opportunities, including especially the AI infrastructure segment.
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 Q2 2024: Security, Collaboration, and Observability Shine
Cisco and NVIDIA Ease Enterprise Adoption of AI Infrastructure
Cisco Hypershield: Autonomous, Application-Centric Security
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.
