Cisco Systems, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2024 ended April 27, 2024; comparisons are with the quarter ended April 29, 2023. Year-to-date figures cover the first nine months of each fiscal year. Financial statements are unaudited.
Business context and results
Cisco designs and sells networking, security, collaboration and observability technologies, together with related services. The quarter included Splunk from its March 18, 2024 acquisition. Cisco reported that customers continued to scrutinize spending and that some were still deploying products shipped in prior quarters.
| Metric | Q3 FY2024 | Q3 FY2023 | First 9 months FY2024 | First 9 months FY2023 |
|---|---|---|---|---|
| Revenue | $12.702B | $14.571B | $40.161B | $41.795B |
| Gross margin | $8.273B; 65.1% | $9.232B; 63.4% | $26.047B; 64.9% | $26.005B; 62.2% |
| Operating income | $2.191B; 17.2% margin | $3.946B; 27.1% margin | $9.563B; 23.8% margin | $10.778B; 25.8% margin |
| Net income | $1.886B | $3.212B | $8.158B | $8.655B |
| Diluted EPS | $0.46 | $0.78 | $2.00 | $2.11 |
| Operating cash flow | Nine months: $7.150B | Prior-year nine months: $13.920B | ||
| Free cash flow | Nine months: $6.678B | Prior-year nine months: $13.304B |
Revenue trends and material changes
- Q3 revenue fell 13% year over year: product revenue declined 19% to $9.024B, while service revenue rose 6% to $3.678B. For the first nine months, revenue declined 4%, with products down 7% and services up 5%.
- Networking product revenue fell 27% in Q3 and 11% year to date. Security grew 36% in Q3 and 14% year to date, substantially reflecting Splunk; Cisco said Security grew 3% excluding Splunk. Collaboration was flat in Q3; Observability grew 27%, including Splunk.
- Q3 revenue declined in all geographic segments: Americas 15%, EMEA 9%, and APJC 12% year over year.
- Gross margin improved, supported by productivity and product mix, partly offset by pricing erosion. Q3 operating income fell 44%, primarily due to lower revenue, restructuring charges and higher acquired-intangible amortization. Q3 net income and diluted EPS each fell 41%.
Cash, debt and liquidity
- Cash, cash equivalents and investments totaled $18.770B at April 27, 2024, down from $26.146B at July 29, 2023. Current assets were $35.886B and current liabilities $40.108B.
- Total debt was $31.993B, versus $8.391B at fiscal year-end, comprising $11.891B of commercial paper and $20.102B of long-term debt. Cisco issued $13.5B of senior notes in February to help finance Splunk and said it remained in compliance with debt covenants. Its $5B revolving credit facility was undrawn.
- Year-to-date operating cash flow declined to $7.150B; Cisco cited cash uses including the Splunk acquisition and tax payments. Cash paid for income taxes was $7.150B, compared with $2.414B in the prior-year period. The company said available cash, investments, operating cash generation and financing access should meet liquidity needs for at least the next 12 months.
- Remaining performance obligations were $38.774B, up 11% from fiscal year-end, including $3.4B associated with Splunk; approximately 52% is expected to be recognized as revenue over the next 12 months.
Acquisition, outlook and risks
- Cisco acquired Splunk for approximately $27.1B in consideration. Since acquisition, Splunk contributed $413M in revenue and a $212M net loss. The preliminary allocation included $19.3B of goodwill and $10.6B of purchased intangible assets; the allocation remains subject to revision.
- The acquisition increased amortization and financing costs. Cisco reported up to $2.0B of estimated future cash compensation expense tied to continued employment of acquired-company employees, including up to $1.5B related to Splunk.
- Cisco said improved customer product deployments in Q3 may not fully resolve demand pressure; some effects may continue through at least fiscal year-end as customers complete installations. The filing provides no specific earnings or revenue guidance.
- A new restructuring plan is expected to affect approximately 5% of the global workforce and carry pretax charges of up to approximately $800M; $542M was recorded in Q3. Cisco expects substantial completion in the first half of fiscal 2025 and expects to reinvest substantially all savings, so future cost savings are not expected to be material.
- Key disclosed risks include uncertain IT spending and product demand, competitive and pricing pressure, supply-chain and inventory exposure, acquisition integration and execution, higher debt and interest costs, cybersecurity and other technology risks, and litigation. Cisco reported $6.004B in inventory purchase commitments and noted that elevated supply-chain balances could lead to excess or obsolete inventory charges if demand weakens.
- Brazilian tax authorities’ asserted claims total $1.416B, including tax, interest and penalties. Cisco disputes the claims but said it cannot determine the likelihood of an unfavorable outcome or reasonably estimate any loss. Other patent litigation remains pending; Cisco generally said outcomes are not reasonably estimable and did not expect material effects from the described matters.
Most important facts for investors to verify
- Whether networking demand recovers as customers complete deployment of previously shipped products, and whether product revenue stabilizes across regions.
- Splunk’s subsequent revenue growth, integration progress, cash contribution, and the realized costs of acquisition-related compensation, amortization and financing.
- Whether Cisco’s margins and operating cash flow hold up as restructuring charges, pricing pressure and interest expense evolve.
- Debt repayment and refinancing needs, including commercial paper balances, and the effect of lower cash and investment balances on capital allocation.
- Inventory and supplier commitments relative to actual demand, plus developments in the Brazilian tax claims and other material contingencies.