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    CSCO
    Earnings call· Jan 2025(Q2 FY25)

    CISCO SYSTEMS, INC. CSCO

    Feb 12, 2025 Source

    Executive summary

    Cisco Q2 FY25 — Strong AI Orders and Recurring Revenue Growth

    Cisco delivered a strong Q2 FY25, exceeding guidance on top and bottom lines, driven by robust AI infrastructure orders, accelerating product order growth, and significant expansion in recurring revenue streams. The company is actively integrating Splunk, launching new AI-focused products, and navigating potential tariff impacts while maintaining a strong capital allocation strategy. Management expressed confidence in continued momentum into the second half of FY25, emphasizing innovation and strategic investments.

    Highlights

    5

    • AI infrastructure orders with webscalers surpassed $350 million in Q2, bringing year-to-date total to approximately $700 million, on track to exceed $1 billion in FY25.

    • Total annualized recurring revenue (ARR) ended the quarter at $30.1 billion, an increase of 22% year-over-year.

    • Total subscription revenue increased 23% to $7.9 billion, representing 56% of Cisco's total revenue.

    • Non-GAAP gross margin came in at 68.7%, up 200 basis points year-over-year, and non-GAAP operating margin was 34.7%.

    • Product orders grew 29% year-over-year, or 11% organically excluding Splunk, marking the fourth consecutive quarter of accelerating order growth.

    Concerns

    3

    • Q3 FY25 non-GAAP gross margin guidance of 67% to 68% implies a step down from Q2's 68.7%, primarily due to the anticipated impact of proposed tariffs on China, Mexico, and Canada.

    • Networking revenue was down 3% year-over-year, with growth in wireless and switching offset by a decline in servers and the last portion of elevated backlog shipments.

    • U.S. federal business, representing less than 10% of total business, faces uncertainty due to government efficiency initiatives, though no material impact is currently modeled.

    Guidance & targets

    8
    CategoryTargetConfidence
    Q3 FY25 Revenue
    $13.9 billion to $14.1 billion
    high materiality
    High
    Q3 FY25 Non-GAAP Gross Margin
    67% to 68%
    high materiality
    High
    Q3 FY25 Non-GAAP Operating Margin
    33% to 34%
    high materiality
    High
    Q3 FY25 Non-GAAP EPS
    $0.90 to $0.92
    high materiality
    High
    FY25 Revenue
    $56 billion to $56.5 billion
    high materiality
    High
    FY25 Non-GAAP EPS
    $3.68 to $3.74
    high materiality
    High
    FY25 Non-GAAP Effective Tax Rate
    approximately 19%
    low materiality
    High
    AI Infrastructure Orders
    exceed $1 billion
    high materiality
    High

    Segment performance

    12
    SegmentRevenueYoYQoQMargin
    Product
    Product revenue growth driven by strong demand, with product gross margin up 250 basis points due to Splunk and productivity improvements, partially offset by pricing.
    		$10.2 billion11%—67.7%
    Service
    Service revenue growth with service gross margin up 110 basis points.
    		$3.8 billion6%—71.6%
    Networking
    Growth in wireless and switching offset by a decline in servers. Q2 FY24 included the last portion of elevated backlog shipments.
    		—-3%——
    Security
    Primarily driven by growth in offerings from Splunk, SASE, and network security.
    Excluding Splunk growth: 4%
    		—117%——
    Collaboration
    Driven by growth in contact center, CPaaS offerings, and collaboration devices, partially offset by a decline in on-prem Webex suite offerings.
    		—1%——
    Observability
    Growth primarily driven by Splunk.
    Excluding Splunk growth: 3%
    		—47%——
    Americas
    Strong product order growth.
    Product orders growth: 30%
    		————
    EMEA
    Strong product order growth.
    Product orders growth: 24%
    		————
    APJC
    Strong product order growth.
    Product orders growth: 35%
    		————
    Service Provider and Cloud
    Product orders driven by triple-digit growth in webscale, with three of the top six webscalers growing orders in triple digits and two growing more than 50%. Telco orders grew more than 20%.
    Product orders growth: 75%Webscale product orders growth: triple-digit
    		————
    Enterprise
    Double-digit growth across all geographic segments.
    Product orders growth: 27%
    		————
    Public Sector
    Growth in all geographies, driven by governments deploying sovereign AI clouds.
    Product orders growth: 13%
    		————

    Operational metrics

    21
    Non-GAAP Net Income
    $3.8 billion
    Q2 FY25

    Above the high end of guidance range.

    Non-GAAP EPS
    $0.94
    Q2 FY25

    Above the high end of guidance range.

    Non-GAAP Gross Margin
    68.7%up 200 bps YoY
    Q2 FY25

    In line with guidance range.

    Non-GAAP Operating Margin
    34.7%
    Q2 FY25

    Above the high end of guidance range.

    Cash and investments balance
    $16.9 billion
    Q2 FY25

    Total cash, cash equivalents and investments.

    Share Repurchases
    $1.2 billion
    Q2 FY25

    Part of capital allocation.

    Dividend
    $1.6 billion
    Q2 FY25

    Quarterly cash dividend, increased by $0.01 per share.

    Capital Returned to Shareholders
    $2.8 billion
    Q2 FY25

    Comprised of quarterly cash dividend and share repurchases.

    Capital Returned to Shareholders
    $6.4 billion
    YTD FY25

    Year-to-date total.

    Share Repurchase Authorization
    $15 billionadditional authorization
    Q2 FY25

    Board authorized additional amount, bringing total outstanding authorization to approximately $17 billion.

    Total ARR
    $30.1 billionincrease of 22%
    Q2 FY25

    Annualized Recurring Revenue.

    Product ARR Growth
    41%
    Q2 FY25

    Product Annualized Recurring Revenue growth.

    Total Subscription Revenue
    $7.9 billionincreased 23%
    Q2 FY25

    Now represents 56% of Cisco's total revenue.

    Total Software Revenue
    $5.5 billionup 33%
    Q2 FY25

    Total software revenue.

    Splunk Growth
    double digits
    Q2 FY25

    Splunk is growing double digits, in line with expectations and profitable ahead of schedule. The calendar alignment of Splunk's Q4 (historically their largest quarter) ending after Cisco's Q2 cutoff means that last week's revenue will flow into Cisco's Q3 results, affecting direct year-over-year comparisons for Splunk's reported revenue within Cisco's Q2.

    Cisco Secure Access Customers
    over 1,000
    Q2 FY25

    Combined with XDR, gained over 1,000 customers in 12 months.

    XDR Customers
    over 1,000
    Q2 FY25

    Combined with Cisco Secure Access, gained over 1,000 customers in 12 months.

    Cisco Secure Access Enterprise Users
    approximately 1 million
    Q2 FY25

    Each supporting approximately 1 million enterprise users.

    XDR Enterprise Users
    approximately 1 million
    Q2 FY25

    Each supporting approximately 1 million enterprise users.

    Industrial IoT Product Solutions Orders Growth
    50%up over 50%
    Q2 FY25

    Signaling an acceleration as customers prepare for AI-powered robotics and industrial security.

    Industrial IoT Product Solutions Orders Growth
    40%up over 40%
    H1 FY25

    Orders grew more than 40% in the first half of fiscal year '25.

    Industry KPIs

    9
    MetricValueDetails
    Capital return$2.8 billionUSD
    Backlog order book$41.3 billionUSD
    Orders backlog qualityFourth consecutive quarterquarters
    Product orders order growth29%%
    Ai cloud infrastructure orders$350 millionUSD
    Recurring software service revenue$7.9 billionUSD
    Revenue mix by product customer type—
    Design wins product cycle transitions51.2-terabit Silicon One chip
    Front end vs back end scale up vs scale across m—

    Orderbook & backlog

    6
    Total Remaining Performance Obligations (RPO)$41.3 billionQ2 FY25

    up 16% YoY

    Product Remaining Performance Obligations (RPO)nullQ2 FY25

    grew 25% YoY

    Total Short-Term Remaining Performance Obligations (RPO)$21 billionQ2 FY25

    up 17% YoY

    AI Infrastructure Orders (Q2 FY25)$350 millionQ2 FY25

    Orders with webscalers in Q2 FY25.

    AI Infrastructure Orders (YTD FY25)$700 millionQ2 FY25

    Year-to-date total for orders with webscalers.

    Product OrdersnullQ2 FY25

    up 29% YoY

    Organic product orders up 11% YoY excluding Splunk.

    Product announcements

    8
    ProductTypeDetails
    AI Defenselaunch
    Splunk on Azurelaunch
    Splunk Federated Analyticslaunch
    AI Assistant for Splunk Observabilitylaunch
    Data Center Smart Switch with embedded DPUslaunch
    Agile Services Networkinglaunch
    Renewals Agentlaunch
    AI POD productlaunch

    Deals & partnerships

    1
    Deeper InsightsAcquisition to expand customer experience teams, technology footprint, and engineering talent.

    Closed the acquisition during Q2 FY25 to strengthen AI position with targeted strategic M&A.

    Risks & headwinds

    3
    Proposed U.S. TariffsQ3 FY25 and beyond

    Additional 10% on China, 25% on Mexico and Canada. Built into Q3 FY25 non-GAAP gross margin guidance (67-68%).

    Mitigation: Company has a strong global supply chain team and has reduced prior China tariff exposure by 80%. Game-planned several scenarios and steps to mitigate impact, primarily through supply chain changes rather than price adjustments. No pull-ahead of demand observed.

    U.S. Federal Government Spending Uncertainty (DOGE)Q3 FY25 and Q4 FY25

    U.S. federal business is less than 10% of total revenue; 75% from DoD. Civilian side activity is the primary concern. No material higher or lower performance modeled for Q3/Q4.

    Mitigation: Management believes government efficiency initiatives could drive technology use. Large deals are getting back on track after initial confusion from executive orders.

    Networking Revenue DeclineQ2 FY25

    Networking revenue down 3% YoY.

    Mitigation: Growth in wireless and switching was offset by a decline in servers. Q2 FY24 included the last portion of elevated backlog shipments, implying a tougher comparison.

    What to watch in Q3 FY25

    4

    Impact of Tariffs on Gross Margin

    Q3 FY25
    CurrentQ2 FY25 Non-GAAP Gross Margin: 68.7%
    TargetWithin 67-68% range, or better if mitigation efforts are effective.

    Why it matters

    Tariffs are a new headwind impacting profitability guidance; verification of management's mitigation effectiveness is key.

    The guide at 68% -- 67% to 68% for Q3, and by the way, I think it settles in in that range for the full year, what's built into that and driving the step down from where we were in Q2 is we have -- and this was noted in the -- in my commentary upfront, we have built in the cost of the proposed tariffs that we've seen so far.

    Q&A highlights

    6

    What is Cisco's exposure to the U.S. federal government, and what scenarios are envisioned regarding potential layoffs or spending changes, particularly given the 'DOGE' (Debt Ceiling / Government Shutdown) noise?

    U.S. federal business is less than 10% of total revenue, with 75% coming from the DoD, largely unaffected by civilian-side activity. Initial confusion from executive orders has subsided, and large deals are back on track. No material change in federal performance is modeled for Q3/Q4, as government efficiency drives technology use.

    “It's important to know that the federal -- U.S. federal business is less than 10% of our total business, first of all. And the other thing to keep in mind is that 75% of our U.S. federal business comes from the DoD, and most of this activity is actually occurring on the civilian side of the business.”

    asked by Simon Leopold · answered by Charles Robbins

    2 min read6 chapters

    Detailed Narrative

    01

    AI Momentum and Strategy

    Cisco reported strong AI infrastructure orders, reaching $700 million year-to-date and projecting over $1 billion for FY25, primarily from webscalers. The company's AI strategy focuses on three pillars: AI training infrastructure for webscalers, AI inference and enterprise clouds with products like AI PODs and Hyperfabric, and AI network connectivity. New products like the data center smart switch with embedded DPUs and AI Defense security solution are designed to support the growing AI demand across these areas.

    02

    Product Order Acceleration and Demand Environment

    Product orders grew 29% year-over-year, or 11% organically excluding Splunk, marking the fourth consecutive quarter of accelerating order growth. This was driven by strong demand across geographies and segments, including a 75% increase in service provider and cloud orders (with triple-digit growth in webscale), 27% in enterprise, and 13% in public sector. Campus switching and data center switching also saw double-digit growth, indicating broad-based strength.

    03

    Recurring Revenue and Software Growth

    The company continues its transition to a more recurring revenue model. Total ARR reached $30.1 billion, up 22%, with product ARR growing 41%. Subscription revenue increased 23% to $7.9 billion, now comprising 56% of total revenue. Total software revenue was up 33% to $5.5 billion, with software subscription revenue up 39%. Total Remaining Performance Obligations (RPO) grew 16% to $41.3 billion.

    04

    Splunk Integration and Performance

    The integration of Splunk is progressing well, with revenue in line with expectations and profitability ahead of schedule. Splunk's contribution significantly boosted security revenue, which was up 117% year-over-year (4% excluding Splunk). New innovations like Splunk on Azure, Splunk Federated Analytics, and AI Assistant for Splunk Observability were launched. Gary Steele, former Splunk CEO and President of Go-to-Market, will be departing, with a search underway for his replacement.

    05

    Capital Allocation and Shareholder Returns

    Cisco returned $2.8 billion to shareholders in Q2, totaling $6.4 billion year-to-date, through dividends and share repurchases. The Board authorized an additional $15 billion for share repurchases, bringing the total outstanding authorization to approximately $17 billion. The quarterly dividend was also increased by $0.01 to $0.41 per share, marking the 14th consecutive annual increase, demonstrating confidence in future business performance.

    06

    Tariff Impact and Mitigation Strategies

    Management has factored the cost of proposed U.S. tariffs (additional 10% on China, 25% on Mexico and Canada) into its Q3 gross margin guidance. While this is expected to cause a slight step down in gross margin, the company has a strong global supply chain team with a track record of mitigating tariff impact🌐s, having reduced exposure from prior China tariffs by 80%. No pull-forward📎 of demand due to tariffs has been observed.

    AI-generated summary of the company’s earnings call. Not investment advice.