Cisco Systems, Inc Q4 2023 Earnings Conference Call Insights

Key highlights from Cisco Systems, Inc (CSCO) Q4 2023 Earnings Concall

Management Update:

• [00:02:32] CSCO said customer demand remained solid, with over 30% total sequential product order growth in 4Q.

• [00:04:33] CSCO is also focused on the acceleration of AI, which will fundamentally create new growth drivers for the company.

Q&A Highlights:

• [00:17:04] Tim Long from Barclays asked about the better-than-seasonal order backlog performance in 4Q and the expectations for those orders to be pulled through into revenues in fiscal ’24. Chuck Robbins CEO replied that CSCO’s sales team exceeded its forecast in 4Q, indicating that the company’s business is stabilizing. The company saw strength in enterprise, commercial, and public sector customers, as well as in financial services, transportation, and energy verticals. CSCO is well-positioned for fiscal ’24 with strong revenue visibility and a shift towards more recurring revenue.

• [00:21:25] Amit Daryanani at Evercore enquired how CSCO defines consistency in capital allocation and plans to dseploy it? Scott Herren CFO replied that consistency of capital allocation, with share buybacks is consistent at around $1.25 billion per quarter and dividends at around $6.5 billion, totaling $11.5 billion of capital return to shareholders. CSCO added that YonY growth rates can be misleading due to supply constraints and a better way to measure growth is to look at CAGR from the end of fiscal ’21 to the midpoint of fiscal ’24, which is around 5%.

• [00:21:40] Amit Daryanani of Evercore also asked about the assumptions for 2H24 that would lead to a 1% full-year revenue growth despite a 7% growth in 1Q. Chuck Robbins CEO answered that CSCO is committed to providing operating leverage in its P&L and increasing the amount of share repurchases. The company is targeting a quarterly buyback rate of $1.6 billion to $1.8 billion.

• [00:25:32] Meta Marshall with Morgan Stanley queried when CSCO expects to see an inflection in its security business, which is currently facing challenges. Chuck Robbins CEO said that CSCO has seen some early traction in its security business, with orders from Goldman Sachs, a retailer in Europe, and a Fortune 10 company. The company expects to see more positive impact in 2H24 and in FY25.

• [00:27:50] Michael Ng from Goldman Sachs also asked about CSCO’s expectations for the trajectory of orders going forward, and whether the company expects orders to grow along with revenue growth after 1Q. Scott Herren CFO answered that CSCO expects to see more normal ordering patterns in 2H24 as lead times normalize and excess backlog is shipped out. The company does not guide orders.

• [00:31:29] Ittai Kidron at Oppenheimer enquired about the significant increase in CSCO’s RPO and what factors are driving this increase. Chuck Robbins CEO said CSCO’s RPO increased significantly due to the company’s transition to a subscription model for its enterprise networking portfolio. CSCO’s record revenue of $57 billion in fiscal 2023 was driven by strong customer demand, including enterprise agreements with large deals.

• [00:35:00] Matthew Niknam of Deutsche Bank asked if the 1% top line growth and 4% non-GAAP EPS growth guidance for FY24 is achievable given the strong exit rate on GM and the potential for OpEx reinvestment. Scott Herren CFO replied that CSCO expects GM to settle in the 65-66% range for the full year of fiscal 2024. This will lead to mid-single-digit OpEx growth, which is in line with expectations given the current economic environment.

• [00:36:47] Jim Fish with Piper Sandler asked if CSCO is restructuring its sales team to focus on cross-selling and how this will help the company improve its performance in the growth segments. Chuck Robbins CEO answered that CSCO is adopting a platform approach for its product portfolio to simplify sales and reduce the need for subspecialists in the field. This approach has already proven successful in collaboration, where CSCO experienced strong order growth in the most recent quarter.

• [00:37:02] Jim Fish at Piper Sandler also enquired about CSCO’s plan for capital returns, and whether the company will make further acquisitions in growth segments or spin off some of its businesses. Scott Herren CFO replied that CSCO is committed to returning $11.5 billion to shareholders through dividends and buybacks, while also evaluating M&A and spin-off opportunities.

• [00:40:26]  Ben Reitzes from Melius Research enquired if the company has seen more activity from hyperscalers in terms of AI orders and Silicon One adoption. Chuck Robbins CEO said CSCO is gaining traction in the AI space with hyperscalers and is confident in winning a significant share of the market. The company is collaborating with hyperscalers to develop purpose-built silicon for AI applications and is well-positioned to capitalize on the market’s growth.

• [00:46:45] Joseph Cardoso of JPMorgan enquired about the performance of CSCO’s service provider business, specifically in the areas of telco, AI and non-AI cloud. Chuck Robbins CEO said CSCO’s service provider business was weak in 4Q, but the company expects orders to stabilize in 2H24 as customers digest the infrastructure they recently purchased.

• [00:52:23] Simon Leopold with Raymond James asked about CSCO’s assumptions for its campus-related business, including switching and wireless LAN. Scott Herren CFO replied that CSCO is confident that it will continue to gain market share in the campus networking market. The company has seen a backlog of orders build up due to supply constraints, but this backlog is now being delivered.