Behind the numbers: five questions from Cisco’s recent quarter

This syndicated post originally appeared at Zeus Kerravala – SiliconANGLE.

Networking giant Cisco Systems Inc. reported good news/bad news numbers in its fiscal first-quarter 2024 results this week, handily beating expectations but lowering its outlook.

Revenue and earnings for the quarter were $14.67 billion and $1.11 per share, respectively, compared wth Street expectations of $14.61 billion and $1.03 per share. However, Cisco’s outlook was lower than expected. The company sees full-year sales for 2024 between $53.8 billion and $55 billion, below its previous estimate of $57 billion to $58.2 billion. This dragged the stock as shares fell over 11% in after-hours trading.

The numbers are the numbers, and though Cisco put up a strong beat, a lowered outlook always spooks investors. However, the numbers don’t always tell the full story. Here are five thoughts that dive deeper into Cisco’s quarter:

Slowdown caused by macro or airgap?

On the earnings call, Chief Executive Chuck Robbins (pictured) explained the airgap in sales is from customers pausing purchasing to deploy the products they have been buying over the past three quarters. During the Q&A, Amit Daryanani from Evercore asked Cisco management why they felt this was a temporary pause versus a larger macro issue. Robbins gave several solid proof points explaining why the company felt this way.

One of the more interesting ones is that Cisco’s shift to a software business brings better visibility. He cited that historically when customers buy Meraki equipment, there is typically a one- to two-quarter delay in activating the products. Another supporting data point is that Cisco saw an uptick in its transactional advanced services, which include implementation services. This indicates that customers are looking for Cisco to help them deploy previously purchased products.

It’s worth noting that an implementation pause is consistent with my research. Customers and channel partners have told me that the availability of products following a long period of supply chain issues caused customers to overpurchase to ensure they have the products even if they don’t need them at this very moment.

Has security turned the corner?

Historically, security dominance has been to Cisco as Moby Dick has been to Captain Ahab. Cisco is, by far, the world’s most dominant network vendor and many security products are attached to the network. Also, recent trends, such as XDR and SSE, heavily depend on the network.

With these being true, why has Cisco never dominated the security industry? I don’t think any vendor will achieve the same level of security share as Cisco in networking, but Cisco’s goal has been to become the de facto standard.

I do want to be clear that Cisco hasn’t failed in security. The company currently does about $1 billion revenue per quarter in security, so 95% of security vendors would love to have Cisco’s “problem.” However, $4 billion of the $70 billion-plus security market is not Cisco’s definition of success.

During the call, Robbins mentioned several times the company is expecting security to continue to grow and take share. He stated, “We expect meaningful positive results in the coming quarters.” This begs the question, why are Robbins and the team so bullish?

The answer lies in the company’s new platform strategy. At its recent Partner Summit event, Cisco took the covers off its three new security clouds, which bring together technology from multiple security products to simplify deployment while increasing efficacy. At Partner Summit, I talked to Chris Konrad, area vice president for global cyber for World Wide Technology, and he told me, “Cisco has always had good products, but they were a collection of best-of-breed products. This negated any kind of platform advantage. Introducing the security suites allows us to take an outcome-based approach to give customers the right technology versus sifting through many options.”

It’s worth noting the new security strategy was put in place by several key hires, including Executive Vice President Jeetu Patel, Senior Vice President and General Manager Tom Gillis and SVP and Chief Product Officer Raj Chopra, all of whom were highly respected executives in their previous companies.

What will the impact of Splunk be?

Earlier this year, Cisco announced its intent to acquire Splunk. Since then, I’ve barely gone a day without someone asking me about the impact of Splunk. Some think it will boost Cisco’s security business, while others like the tie to full stack observability, and others like the impact on networking. The reality is they’re all true. All of Cisco’s product areas are evolving to be AI-driven, which takes lots of data, and Splunk will give Cisco buckets of it.

One of the underappreciated aspects of the Splunk deal is the impact on Cisco CX, the company’s services organization. At Partner Summit, I met with CX leadership, and they told me that the group consumes more Splunk data than any other at Cisco. The ability to see and analyze more data enables Cisco CX to understand better technology utilization, which maps directly to business outcomes. I do think Splunk was expensive, but I also think, if an acquisition is a good one, the acquiring vendor can’t overpay, and this is a good one as I expect Splunk data to be used across the company.

Is collaboration on the rise?

Since the pandemic, the collaboration business at Cisco has been lumpy, with a few good quarters but more where the business declined year-over-year. This quarter, collaboration posted a 3% gain, a positive sign. Like security, collaboration has been the victim of good products lacking strategy. but the leadership has spent the better part of the last three years rebuilding Webex to be cloud-native, infusing artificial intelligence and launching its cloud contact center offering.

Now, the product is ready to go, and Cisco has many unique innovations coming, such as an AI-based codec that can deliver high-definition audio and video with up to 90% packet loss. Also, its willingness to partner with Microsoft Teams versus fighting it, seems to be adding to the collaboration tailwinds. I heard that the company closed many large deals at its recent WebexOne event, so growth may become the norm versus the exception.

Is Cisco finally firing on all cylinders?

One of the more interesting aspects of this quarter is that all the product areas showed year-over-year growth. Chief Financial Officer Scott Herren showed a slide where networking was up 10%, security 4%, collaboration 3%, Observability 21%, and Services was up 4%. This is meaningful, since I don’t remember when all product areas grew year-over-year.

Historically, I’ve described Cisco as an eight-cylinder car with one cylinder that’s misfiring. Now, it appears all of them are firing. Webex has been retooled, the security suites and SiliconOne has been growing networking, and Splunk is on the horizon.

I believe the one- to two-quarter slowdown is what management says it is – a period of time customers need to digest products. After that, I am expecting Cisco to hit the accelerator because it will have given time for the security and collaboration strategies to kick into the channel to complement a strong networking business.

Author: Zeus Kerravala

Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his clients in the current business climate and long term strategic advice.