Unraveling Cisco Earnings, Layoffs, And Partnerships In Q2 FY 2024

Cisco earnings for the second quarter (Q2) of fiscal year (FY) 2024 were at the higher end of the company’s outlook but lower than analysts' expectations. The networking giant issued an even more conservative outlook for the next quarter due to uncertainties in demand for several of its offerings. 

Given that development, the company also announced job cuts, following the lead of a long list of IT companies to do so in the recent past. Much like those companies, the purpose is cost-cutting. But all is not gloomy in the outlook ahead.

In this article, we will discuss the following:

• The current outlook for leading network equipment manufacturers.
• What their forays into artificial intelligence could mean.
• How strategic acquisitions and partnerships could turn things around in the long run.

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Q2 FY 2024 Cisco Earnings

According to Cisco’s Q2 earnings report, the company reported a revenue of $12.8 billion. This revenue exceeded the company’s expectation from last quarter when it guided a revenue between $12.1 and $12.3 billion. However, year-on-year, the revenue was down by 6%. 

The quarter's earnings per share (EPS) were 87 cents, as expected, but a percent lower than the same quarter of last year. 

Technically, the company exceeded its own outlook on revenue from the last quarter. It’s important to mention that it had made conservative estimates in line with uncertainty in demand, especially for its networking products, which comprise the lion’s share of its revenue. 

This quarter's net income was $2.6 billion (GAAP), down 5% from last year’s second quarter. 

Product Category Breakdown

Cisco saw a mix of growth and loss in terms of product categories. Security, collaboration, and observability of products and services registered growth. 

Revenue from security products grew by 3% year over year, likely due to the security product upgrades announced in 2023. More importantly, Cisco is bringing AI into its security solutions, further solidifying its position in the cybersecurity market. 

The observability category saw the most impressive growth, with a 16% increase in revenue, thanks to ThousandEyes, an Internet monitoring software. The company has been pushing this product with other products in its portfolio, bringing more customers into the mix. 

Collaboration products and services were up by 3%. That’s largely because Cisco invested in this category last year, significantly upgrading the offering. 

Cisco’s leading product and services category, networking, registered a decline of 12% year-on-year. Still, as the leading category, it was responsible for a little over $7 billion in Q2 FY 2024. 

“We saw declines across switching, wireless, and routed optical networking, driven primarily by weakness in the enterprise, service provider, and cloud markets,” claimed Scott Heren, Cisco's Chief Financial Officer (CFO), in the earnings call.

Software revenue was flat this quarter, at $4.2 billion. However, software subscriptions were up by 5%. Cisco is gradually shifting from a hardware-only vendor to a hardware and software provider, continuously adding more software subscriptions to its portfolio. The share of software revenue also evidences this. 

Layoffs Announced

Cisco also announced that it will be laying off 5% of its workforce globally, roughly equivalent to 4,250 jobs. It’s doing so to cut costs. It’s the latest big tech company to announce layoffs this year, as some other tech giants like Alphabet and Microsoft also announced layoffs. 

With these cuts, the company is expected to add approximately $800 million to its pretax earnings. 

Despite strong fiscal performance, the company is bent on taking measures to right-size its costs. The news of the layoffs caused Cisco stock to drop 9% in extended trading. 

Investments In AI And Partnerships

Like many other key players in the industry, Cisco is betting big on AI. It’s particularly hopeful of its partnership with NVIDIA. 

“We continue to capitalize on the multibillion-dollar AI infrastructure opportunity. This quarter, we announced the next phase in our partnership with Nvidia to offer enterprises simplified, cloud-based, and on-prem AI infrastructure,” Chief Executive Officer Chuck Robbins said in the earnings conference.

He expects the partnership to show an impact in FY 2025. 

It’s also worth mentioning that Cisco will acquire Splunk, a software company. This acquisition is expected to increase Splunk's valuation and recurring revenue by as much as $4 billion. 

Cautious Outlook Going Forward

Cisco’s outlook for the next quarter, Q3 of FY 2024, is also cautious because uncertainty continues to prevail. But in the case of Cisco, the delayed deployment of products shipped by the company has created what one analyst called an “air pocket.”

Cisco’s earnings report provided guidance on revenue for the next quarter in the range of $12.1 to $12.3 billion, the same as its guidance for the current quarter. The guidance for the annual revenue for FY 2024 is set in the range of $51.5 to $52.5 billion. 

Here’s how Robbins explained the outlook: “First, in terms of the macro environment, we are seeing a greater degree of caution and scrutiny of deals given the high level of uncertainty. As we're hearing this from our customers, it's leading us to be more cautious with our forecast and expectations,” he explained. 

“Second, as we discussed last quarter and subsequently saw in other technology provider results, customers have been taking time since the start of our fiscal 2024 to deploy the elevated levels of products shipped to them in recent quarters and this is taking longer than our initial expectations. Third, we also continue to see weak demand with our telco and cable service provider customers,” he furthered.

Cisco earnings may not see significant increases before FY 2025. However, it will likely meet its guidance and industry expectations in the remaining two quarters of FY 2024. Also, the company’s new and revamped products, growing software subscriptions, and partnerships will help them pull through despite the uncertainty and the so-called air pocket. 

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