Cisco Systems, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Fiscal second quarter and first six months ended January 27, 2024; comparisons are with the corresponding prior-year periods. Unaudited results. Cisco designs and sells networking and related technology, software, and services globally.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $12.791B | $13.592B | $27.459B | $27.224B |
| Gross margin | $8.217B; 64.2% | $8.427B; 62.0% | $17.774B; 64.7% | $16.773B; 61.6% |
| Operating income | $3.096B; 24.2% margin | $3.292B; 24.2% margin | $7.372B; 26.8% margin | $6.832B; 25.1% margin |
| Net income | $2.634B | $2.773B | $6.272B | $5.443B |
| Diluted EPS | $0.65 | $0.67 | $1.54 | $1.32 |
- Q2 revenue declined 6% year over year: product revenue fell 9% to $9.232B, while services grew 4% to $3.559B. Six-month revenue increased 1%; product was nearly flat and services grew 4%.
- Q2 product gross margin rose 2.5 percentage points to 62.7%, mainly on productivity and product mix, partly offset by pricing erosion. Service gross margin was 68.2%, up 1.0 point.
- For the first six months, gross margin expanded 3.1 points and operating margin expanded 1.7 points. Operating expenses increased 6% to $10.402B; R&D, sales and marketing, and G&A together rose 6%.
- Q2 networking revenue fell 12% to $7.081B; security grew 3%, collaboration 3%, and observability 16%. Subscription revenue increased 5%, while total software revenue was flat at $4.2B.
- By geography, Q2 revenue declined 4% in the Americas, 7% in EMEA, and 12% in APJC. First-half Americas revenue grew 5%, offset by declines in EMEA and APJC.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow was $3.179B, down from $8.701B; free cash flow, as Cisco defines it, was $2.875B versus $8.355B. The filing attributes cash-flow volatility in part to tax-payment timing, including a $2.8B federal tax payment deferred from fiscal 2023 and a $1.4B U.S. transition-tax payment.
- Cash and cash equivalents were $13.715B; cash, cash equivalents, and investments totaled $25.671B at January 27, 2024, versus $26.146B at July 29, 2023. Accounts receivable was $4.884B and inventory was $3.209B.
- Total debt carrying value was $11.605B: $4.936B short-term and $6.669B long-term. Short-term debt included $3.939B commercial paper. Cisco reported compliance with debt covenants and no borrowings under its revolving credit facility at quarter-end. Commercial paper outstanding was approximately $6.9B as of February 19.
- First-half cash uses included $3.163B of dividends, $2.504B of repurchases under the buyback program, and $878M for acquisitions, net of acquired cash. The remaining share-repurchase authorization was approximately $8.4B. A $0.40-per-share dividend was declared after quarter-end.
- Remaining performance obligations were $35.656B, up 2% from fiscal year-end; Cisco expects approximately 50% to be recognized as revenue over the next 12 months. Deferred revenue was $25.771B.
Material developments, outlook, and risks
- Management said customers were scrutinizing spending and customers and resellers were still absorbing elevated shipments from prior quarters. Cisco estimated it was one to two quarters from full shipment implementation and expected the product-demand effects could persist through at least fiscal year-end.
- Cisco agreed to acquire Splunk for $157 per share in cash, approximately $28B in equity value. At the time of the filing, closing was expected in late Q1 or early Q2 calendar 2024, subject to regulatory and customary conditions, and financing was expected to combine cash and debt. Cisco disclosed a potential $1.5B termination fee in specified circumstances if the deal were terminated.
- After the reporting period, Cisco initiated a restructuring plan expected to affect approximately 5% of its global workforce, with estimated pretax charges of approximately $800M, primarily cash-based. Substantial completion was expected in the first half of fiscal 2025; savings are expected to be substantially reinvested, so material net cost savings are not anticipated. The prior restructuring plan was completed in Q2 FY2024.
- Inventory and supplier commitments declined from fiscal year-end, but management noted supply-chain balances remained above historical levels. Inventory purchase commitments were $6.193B; excess inventory, obsolescence, and demand weakness could pressure future margins.
- Other items include $134M of net losses on privately held investments in Q2 and $2.0B of unrecognized tax benefits at quarter-end. Brazilian tax authorities asserted claims totaling $1.467B, including tax, interest, and penalties; Cisco disputes the claims and said it could not estimate the likelihood or range of loss. Several patent matters remain pending, with ultimate outcomes not estimable.
- Management stated that available cash, investments, operating cash generation, capital-market access, and credit lines were expected to meet liquidity needs for at least the next 12 months, including the planned Splunk acquisition. This is subject to deal closing, financing, and operating conditions.
- Principal risks discussed include uncertain macroeconomic demand, competitive pricing, customer shipment digestion, supply-chain and inventory exposure, acquisition integration and financing, cybersecurity and privacy, AI-related legal and regulatory uncertainty, litigation, and tax uncertainty. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Track networking demand, customer and reseller inventory absorption, bookings, and whether the expected demand weakness extends beyond fiscal 2024.
- Assess whether stronger gross margins can persist as productivity benefits, pricing, product mix, and elevated inventory-related risks change.
- Reconcile operating cash flow with tax-payment timing and monitor cash generation, commercial-paper balances, and total debt after the Splunk transaction.
- Verify Splunk’s closing status, regulatory approvals, final financing mix, integration progress, and any material transaction costs or termination exposure.
- Monitor the restructuring’s actual charges, workforce impact, timing, and reinvestment, alongside the effect of share-based compensation and operating expenses.
- Follow resolution of the Brazilian tax claims, other material litigation, tax examinations, and potential investment impairments.