CISCO SYSTEMS, INC. Q1 FY2025 earnings call

Cisco had a strong start to fiscal '25 with revenue at the high end of guidance. Non-GAAP EPS of $0.91 exceeded guidance, driven by high non-GAAP gross margin and Splunk integration. Product orders grew 20% YOY (9% organic), driven by enterprise (33% growth), service provider/cloud (28% with webscale triple-digit growth), and public sector (2% after strong Q4). AI momentum was strong with webscale customers placing over $300M in AI infrastructure orders in Q1, and pipeline set for $1B AI orders FY25. Splunk integration saw 12 updated data integrations and joint selling motions. Investments included closing DeepFactor and Robust Intelligence acquisitions, and announcing intent to acquire Deeper Insights AI. $3.6B was returned to shareholders via share repurchases and dividends.

Cisco delivered $13.8 billion in revenue for the first quarter, with total product revenue at $10.1 billion (down 9% YOY) and service revenue at $3.7 billion (up 6% YOY). Networking was down 23% primarily due to elevated shipments in the prior year, but order growth was seen as customers worked down inventory. Security revenue was up 100% (driven by Splunk and new products; ex-Splunk, up 2%). Collaboration revenue was down 3% (impacted by on-prem Webex Suite and devices, partially offset by contact center and CPaaS). Observability revenue was up 36% (driven by Observability Suite and Network Assurance; ex-Splunk, up 1%). ARR ended at $29.9 billion (up 22%), with product ARR growing 42%. Subscription revenue accounted for 57% of total revenue. Non-GAAP gross margin was 69.3% (highest in over 20 years), product gross margin was 68.9% (up 240 basis points), and services gross margin was 70.3% (up 130 basis points). Non-GAAP operating margin was 34.1% (above guidance).

For Q2 FY25, revenue is expected to be in the range of $13.75 billion to $13.95 billion; non-GAAP gross margins to be 68% to 69%; non-GAAP operating margin to be 33.5% to 34.5%; and non-GAAP EPS to range from $0.89 to $0.91. For FY25, revenue is expected to be $55.3 billion to $56.3 billion, and non-GAAP EPS is expected to range from $3.60 to $3.66.

Uncertainties in U.S. federal spending due to continuing resolutions and the Fiscal Responsibility Act; macroeconomic conditions affecting customer spending; and competition in the technology space impacting market share.

Q: Talked about cloud and service provider orders growth, drivers and margins.

A: Cloud orders driven by webscale with over 100% growth, including AI and traditional components. Margins driven by Splunk integration, favorable product mix, productivity improvements, and a one-time duty drawback benefit.

Q: Macro backdrop and election impact.

A: U.S. federal spending delayed due to continuing resolutions, but other regions showed strong growth; elections expected to lead to a budget resolution soon.

Q: Security deal details and organic growth.

A: Hypershield deal with a large bank, organic security growth mid-to-high teens excluding federal, with over 1000 customers deploying new security technologies.

Q: AI orders and Splunk contribution.

A: AI accounted for half of webscale orders, with Splunk integration progressing in line with expectations, contributing to revenue and profitability as planned.