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Cisco’s Q4 Results Show Company Well-Positioned for AI Opportunities

Published 08/17/2023, 03:05 PM
Updated 04/07/2022, 04:55 AM

Cisco Systems (NASDAQ:CSCO) shares rose in early Thursday trading after the IT networking company provided positive updates on the earnings call. The stock initially fell in after-hours Wednesday after the company’s FQ4 results and guidance failed to entice investors.

The company said its revenue rose 16% year-over-year to $15.2 billion, just ahead of the consensus of $15.05 billion. For its full fiscal 2023 year, Cisco generated sales of $57 billion. Adjusted earnings per share of $1.14 also managed to come in higher than the consensus of $1.06.

"This past year was a milestone year for Cisco with record performance in both the full year and Q4," said Chuck Robbins, chair and CEO of Cisco. "We are seeing solid customer demand, gaining market share, and innovating in key areas like AI, security, and cloud. This momentum gives us confidence in our ability to capture the many opportunities ahead."

Solid Results and Guidance Given Tough Macro

Cisco generated $6 billion in operating cash flow, which is a significant increase of 62% compared to the same period last year. Product revenue was up 20% while service revenue rose 4%. Business units Secure and Agile Networks both saw their sales rise 33% YoY, while Optimized Application Experiences jumped 15%.

Region-wise, the company witnessed the strongest growth in the Americas region, which also yielded gross margins of 65%. Overall, Cisco reported a total gross margin of 65.9%, which marks a 260-basis points expansion compared to the year-ago period. The adjusted operating margin stood at 35.4%, topping the consensus by 70 bps.

Cisco also said it made progress on business model transformation with total software revenue rising 17%. The company’s ARR (annualized recurring revenue) came in at $24.3 billion, up 5% YoY. Similarly, the RPO (remaining performance obligations) now stands at $34.9 billion, up 11% YoY.

"We delivered double-digit growth in revenue and EPS, generating strong operating leverage in Q4," said Scott Herren, CFO of Cisco. "Our business model transformation drove double-digit growth in software revenue, product ARR and total RPO, leading to greater visibility and predictability. We are committed to expanding operating leverage and increasing shareholder returns over the long term."

Following solid results, Cisco has declared a quarterly dividend of $0.39 per common share to be paid on October 25 to all stockholders of record as of the close of business on October 4.

For this quarter, the company guided for adjusted EPS of $1.03 on revenue of $14.6 billion. This revenue guide implies a 4% decline in sales on a sequential basis. Analysts were looking for adjusted EPS of $0.99 on revenue of $14.57 billion.

The adjusted gross margin is seen at 65.5% while the adjusted operating margin is expected to come in at 34.5%. Both topped the average analyst estimate.

For FY24, Cisco expects EPS in the range of $4.01-4.08 on revenue of $57-58.2 billion, which compares to the analyst consensus for adjusted earnings of $4.05 per share on revenue of $58.3 billion.

Super Well Positioned for AI Transition

While Cisco shares initially dipped on the softer-than-expected full-year revenue guidance, they recovered to trade modestly in the green in the aftermath of the company’s FQ4 earnings call. Robbins argued that the accelerated AI transition “will fundamentally change our world and create new growth drivers for us.”

He reminded investors and analysts on the call that Cisco has been investing in AI for years, including the recently-announced AI products that were described as “market-leading.” These AI-powered products will boost productivity, enhance policy management, and simplify tasks, he said:

“Cisco's ASIC design and scalable fabric for AI position us very well to build out the infrastructure that hyperscalers and others need to build AI ML clusters. This is a huge opportunity for Cisco, and we are laser-focused on leading and winning in this space. As a result of our innovation in this area, we expect Ethernet will lead in connecting AI workloads over the next five years,” Robbins added.

Speaking specifically about Ethernet, Cisco said it has already taken orders “for over half a billion dollars” for AI Ethernet fabrics. In addition to Ethernet, security remains one of the top priorities and growth drivers for Cisco.

Along these lines, the company recently launched a new security service edge solution, which is designed to allow for better hybrid work experiences and significantly simplify access across any location, device, and application.

Generative AI technology is leveraged to improve threat response. It helps to reduce policy complexity, while also working swiftly to detect and remove threats. Cisco said it has incorporated its Zero Trust Access (ZTA) capabilities into a native experience on Apple's) iOS and macOS.

"At Apple, we believe deeply in providing privacy and security that is built in from the ground up,” said Susan Prescott, Apple’s Vice President of Enterprise & Education Marketing. “Later this year, iPhone, iPad, and Mac will have native support for network relays. Together with Cisco Secure Access, enterprises will have a secure and seamless remote access solution, to do their best work from anywhere, on the best devices for business.”

Back to AI, CFO Herren urged patience as the benefits from AI investments are not yet in P&L. Herren said that:

Cisco is “invested early in the AI game” and it remains hopeful that it can become one of the bigger beneficiaries as the company is “getting early success.”

Cisco stock was also boosted by CEO comments that the company gained more than 3 percentage points of market share YoY in its three largest networking markets: Campus switching, wireless LAN, and SP routing.

“We expect further share gains in these areas as market share numbers are released for calendar Q2,” Robbins said on the call.

Summary

Cisco reported a solid set of results for its fourth fiscal quarter, as well as offered an FQ1 forecast that topped analyst estimates. This, coupled with positive updates on the earnings call about the AI transition helped offset a weaker-than-expected full-year revenue guidance.

***

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

Latest comments

Still harping on AI hype when most of the sock puppet AI 🐂💩 analysts are not getting paid now.......
how much do they pay you? we all know how this works
good report cuck. going opposite of you 👍
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