Cisco Systems, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended October 28, 2023; compared with the three months ended October 29, 2022. Financial statements are unaudited. Cisco designs and sells networking, security, collaboration, observability and related services.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $14.668 billion | $13.632 billion | Up 8% |
| Product revenue | $11.139 billion | $10.245 billion | Up 9% |
| Service revenue | $3.529 billion | $3.387 billion | Up 4% |
| Gross margin | $9.557 billion; 65.2% | $8.346 billion; 61.2% | Up 4.0 percentage points |
| Operating income | $4.276 billion; 29.2% margin | $3.540 billion; 26.0% margin | Up 21% |
| Net income | $3.638 billion | $2.670 billion | Up 36% |
| Diluted EPS | $0.89 | $0.65 | Up 37% |
| Operating cash flow | $2.371 billion | $3.962 billion | Down $1.591 billion |
| Free cash flow | $2.237 billion | $3.786 billion | Down $1.549 billion |
Product gross margin rose to 64.5% from 59.2%, primarily on productivity improvements, lower freight, logistics and component costs, favorable pricing and product mix. Service gross margin was 67.3%, unchanged year over year. Research and development, sales and marketing, and general and administrative expenses together were 34.7% of revenue in both periods. The effective tax rate declined to 18.1% from 23.2%, mainly due to lower net discrete tax expenses. Higher interest income also contributed to the improvement in income before tax.
Liquidity, debt and capital allocation
- Cash, cash equivalents and investments totaled $23.523 billion at quarter-end, down from $26.146 billion at July 29, 2023. Cash and cash equivalents alone were $9.602 billion.
- Debt carrying value was $7.650 billion: $990 million current and $6.660 billion long-term. Cisco reported compliance with debt covenants and no borrowings under its $3.0 billion revolving credit facility.
- Operating cash flow included a $2.8 billion federal tax payment deferred from fiscal 2023 following California floods; cash taxes paid were $3.090 billion versus $1.150 billion in the prior-year quarter. Cisco expects to pay approximately $1.4 billion of U.S. transition tax in Q2 FY2024.
- Quarterly cash returned to shareholders included $1.580 billion of dividends and $1.252 billion of share repurchases. The board declared a $0.39-per-share dividend payable January 24, 2024, subject to the stated record date.
- Deferred revenue was $25.659 billion, and remaining performance obligations were $34.753 billion; Cisco expects approximately 51% of RPO to be recognized over the next 12 months.
Material changes and management commentary
- Networking revenue increased 10% to $8.822 billion; Security rose 4% to $1.010 billion, Collaboration rose 3% to $1.117 billion, and Observability rose 21% to $190 million.
- Americas revenue increased 14% to $9.022 billion. EMEA was approximately flat at $3.664 billion, while APJC declined 3% to $1.982 billion. Product revenue growth in the Americas was partly offset by weakness in service provider and cloud markets, including declines in China and Japan.
- Management said supply constraints and customer lead times had largely normalized, enabling increased product deliveries. However, product demand declined during the quarter as customers—particularly larger enterprise, service provider and cloud customers—needed time to implement elevated shipments from prior quarters. Cisco estimated this represented one to two quarters of shipments not yet deployed.
- Inventory declined 8% from fiscal year-end to $3.342 billion, and supplier purchase commitments declined 10% to $6.504 billion. Both remained above fiscal 2022 levels; management cited continuing exposure to excess and obsolete inventory if demand weakens.
- Cisco incurred $123 million of restructuring charges in the quarter and $658 million cumulatively under its fiscal 2023 plan, which was substantially completed. The company expects to reinvest substantially all associated savings, so future net savings are not expected to be material.
Outlook, significant items and risks
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Cisco said its cash, investments, operating cash generation, capital-market access and credit lines should meet liquidity requirements for at least the next 12 months.
- Cisco agreed to acquire Splunk for $157 per share in cash, approximately $28 billion in equity value. The company expects a combination of cash and debt financing and anticipated closing by the end of Q3 calendar 2024, subject to regulatory, shareholder and other customary conditions. The filing identifies execution, financing, regulatory and integration risks; certain termination circumstances could require a fee of approximately $1.5 billion.
- Key operating risks include uncertain macroeconomic conditions, slowing orders while customers deploy prior shipments, competitive pressure, and possible renewed supply constraints. Inventory, purchase commitments and supplier arrangements could create margin pressure if demand falls materially or persistently.
- Legal matters include Brazilian tax claims totaling approximately $1.507 billion in asserted taxes, interest and penalties; Cisco disputes the claims and says it cannot estimate the likelihood or range of loss. A decision remained pending in the U.S. Centripetal patent proceedings; Cisco stated it could not reasonably estimate the litigation outcomes.
- Market risks include interest-rate sensitivity in investments and financing receivables, foreign-currency movements, equity investment volatility, cybersecurity and privacy issues, and evolving AI-related legal and regulatory risks.
Most important facts for investors to verify
- Whether orders and product demand recover as customers deploy prior-quarter shipments, especially among enterprise, service provider and cloud customers.
- Whether product gross-margin gains and inventory normalization continue without material excess-inventory or supplier-commitment charges.
- The timing, regulatory approvals, financing terms and integration implications of the proposed Splunk acquisition.
- The cash-flow effect of tax-payment timing, including the expected $1.4 billion transition-tax payment, and the sustainability of shareholder returns after the acquisition.
- Developments in the Brazilian tax claims and patent litigation, and any material change in the company’s assessment of potential loss.