The operator introduces the Cisco's First Quarter Fiscal Year 2024 Financial Results Conference Call and introduces the speakers, Sami Badri, Chuck Robbins, and Scott Herren. Sami Badri explains the format of the call and the changes in reporting revenue and customer markets. He also mentions that financial information can be found on the Investor Relations website. The speakers will be referencing both GAAP and non-GAAP financial results and will be making year-over-year comparisons.

Cisco's first quarter results for fiscal 2024 were strong, with record revenue and profitability. The company's revenue was at the upper end of their guided range and EPS exceeded expectations due to strong gross margins and expense control. Cisco also returned $2.8 billion to shareholders in Q1. The company is focused on transforming its business towards software and recurring revenue streams, and remains committed to driving operating leverage and shareholder returns. Customers are now focused on implementing the high levels of products delivered in the previous three quarters.

The supply chain bottleneck has shifted to implementation by customers and partners, resulting in a slowdown in new orders. This is temporary and expected to improve in the second half of the fiscal year. Cisco remains confident in their business and future growth opportunities, evidenced by stable win rates, low cancellation and return rates, and market share gains. The company plans to acquire Splunk in order to enhance their data platform and provide customers with enhanced digital resiliency.

The combination of Cisco and Splunk supports their strategic objectives and drives growth, software capabilities, and ARR. Their strong quarterly performance was driven by customer investments in generative AI, cloud, security, and full stack observability. They continue to gain market share in networking markets and have already secured over $1 billion in orders for AI infrastructure. They are working with key partners to create solutions for AI infrastructure and believe there is a great opportunity for innovation in this space. The AI switching market is forecasted to exceed $10 billion in 2027 and Cisco is well-positioned to win in this market with their scalable fabric for AI and Cisco Silicon One technology.

Cisco is focused on strengthening their security platform and has seen success with their XDR solution and new security offers. They have also introduced new AI capabilities in their Collaboration portfolio. While demand may be temporarily affected by the current environment, Cisco remains confident in their future opportunities and is committed to operating efficiently.

Cisco reported strong results in Q1, with revenue of $14.7 billion, up 8% year-over-year. Non-GAAP net income was $4.5 billion, up 28%, and non-GAAP EPS was $1.11, up 29%. Networking drove the increase in product revenue with 10% growth, while security, collaboration, and observability also saw growth. Cisco continues to transition to more recurring revenue with solid performance in ARR, software revenue, and subscription revenue. RPO was up 12% year-over-year, with product RPO up 14% and service RPO up 11%. Short-term RPO increased 8% to $17.6 billion.

In the first quarter, product orders declined 20% overall, with the Americas down 19%, EMEA down 13%, and APJC down 38%. Service Provider & Cloud and Enterprise markets saw the biggest declines, while Public Sector was up slightly. Non-GAAP gross margin increased by 410 basis points, driven by productivity improvements and lower costs. Non-GAAP operating margin also improved by 480 basis points due to strong gross margin and cost management. The company ended the quarter with $23.5 billion in cash and investments, and returned $2.8 billion to shareholders through dividends and share repurchases. The company remains committed to increasing shareholder returns and investing in innovation.

In the first quarter, the company announced their intention to acquire Splunk and closed several other acquisitions in line with their strategy to strengthen their position in cloud, security, observability, and AI. They delivered a solid quarter with increased operating leverage and stronger than expected earnings per share. The company is focused on shifting to more recurring revenue and managing expenses while still investing in innovation and growth opportunities. The supply chain bottleneck has shifted downstream to customer and partner implementation, but the company expects a return to normal levels in the next one to two quarters. For the second quarter, they anticipate revenue in the range of $12.6 billion to $12.8 billion, with a non-GAAP gross margin of 65-66%, non-GAAP operating margin of 31.5-32.5%, and non-GAAP earnings per share of $0.82-0.84.

The company updates its guidance for fiscal year 2024, expecting revenue to be between $53.8 billion to $55 billion and non-GAAP earnings per share to be between $3.87 to $3.93. They assume a non-GAAP effective tax rate of 19% for both Q2 and the full year. The CEO thanks the team for their performance and expresses confidence in the business and its growth opportunities. The call then moves on to a Q&A session. The first question asks about the company's assumptions for growth seasonality, to which the CEO responds that they expect a return to order growth in the second half of the year and a sequential increase in revenue from Q2 to Q3.

During a conference call, Meta Marshall from Morgan Stanley Investment Research asked Chuck Robbins, CEO of Cisco, about the changes in investment categories and when they can expect them to return. Chuck believes that the investment priorities will remain the same, with potential acceleration in security and updates on the AI opportunity. Amit Daryanani from Evercore asked about the conviction that this is a short-term implementation pause rather than a demand-related weakness. Chuck did not provide further details but confirmed that they had $1 billion in AI orders, which is twice the amount from the previous quarter.

The speaker explains that the inventory issue is due to delays in product activation and connection to the cloud, as well as special clauses for government contracts that prioritize their shipments during the supply chain crisis. Customers and sales teams have also expressed concerns about this issue at Partner Summit.

In the first quarter, the company saw a steady flow of product orders and a significant increase in implementation services, indicating that customers are seeking help with technology. One partner alone has hired 200 people solely for this purpose. The company believes the issue is a consumption problem with customers, rather than a macro issue. The company has already taken orders for over $500 million for infrastructure to support AI networks and GPUs in the cloud. The numbers given today are forward-looking.

In fiscal year ‘25, the broad ethernet build-out is expected to occur underneath GPUs, with $1 billion worth of orders already in sight. Ethernet fabric has been deployed in three of the four major Hyperscalers in the US and partnerships with AMD, Intel, and NVIDIA are being formed to create solutions for the enterprise. There is a lot of activity in the AI space and the company is working on integrated solutions with NVIDIA, leveraging their technology and go-to-market strength. The networking segment is seeing strong growth in datacenter but weaker performance in campus.

In response to a question about the transition to a new segmentation, Chuck Robbins, the CEO of the company, discusses the current demand signal and inventory levels in the networking segment. He notes that while there is no significant difference between datacenter and campus networking, there is a slower pace of inventory for wireless access points. The next question is about the company's share repurchase cadence and whether they will be more aggressive in the upcoming quarter, given the current dynamics and the Splunk deal. Chuck Robbins clarifies that the Splunk transaction will be outside of the transactional costs.

Splunk's transaction will not have an effect on their capital return, as they expect to continue with a higher level of share buybacks and increasing dividends. They may also be opportunistic with share buybacks, but this is not confirmed. In the Q&A session, Chuck Robbins clarifies that the impact on orders was more pronounced in October, but they have seen some improvement in the first couple weeks of November. They believe the inventory and installation issues are mainly affecting large partners, not SMBs. However, they are still factoring in headwinds on the revenue side for the next couple of quarters.

The company had a normal year-end sales period, but things did not materialize as expected in October. The consumption issue was primarily affecting larger customers, while smaller ones were not impacted. The backlog is back at normal levels, but the guidance for Q2 and the rest of the year does not include backlog conversion into revenue. The company expects orders to accelerate in the second half, with revenue increasing sequentially and year-over-year in the third and fourth quarters.

In response to a question about the company's expectations for the second half of the year, Scott Herren confirms that they are expecting sequential improvement in both orders and revenue, with easier compare points in the second half. He also notes that their backlog has normalized and they have a strong supply chain team. In terms of margins, they expect a dip due to the flow of revenues in the second half.

Cisco expects gross margins to settle at 65-66% for the year, with the second half of the year likely closer to the higher end. The company anticipates continued difficulty in the service provider sector, with web scale orders increasing in the second half. The issue of excess inventory has been ongoing for three quarters, but is now becoming more evident at Cisco. The issue is also spreading to enterprises, which is not typical, and may be related to distribution channel inventory.

The speaker believes that the recent relevance of the topic is due to the large backlog of orders that have been fulfilled in the past six months, which is significantly higher than normal. They mention that cloud providers have been buying ahead, and that the top 200 customers, who may order hundreds of switches, could be experiencing delays due to partner resources or staging. The CFO adds that product revenue growth has been 9% this quarter, but was 20% in Q4 and 17% in Q3, indicating a significant amount of orders being pushed out. The last question asks about feedback from hyperscalers on the company's improving position with them compared to a few years ago.

Chuck Robbins and Scott Herren answer questions about Cisco's sales strategy and recent order slowdown. Robbins discusses how they regained their footing with cloud players by being flexible and listening to their needs, and how they are now focused on performing and delivering on their promises. Herren explains that the order slowdown was primarily in the enterprise sector, and that Cisco has cleared their backlog faster than other companies in the industry.

In the paragraph, Chuck Robbins, CEO of Cisco, discusses the company's recent performance in the first quarter and acknowledges a temporary demand issue. He expresses confidence in the company's long-term opportunities, including in AI, security, and the recent acquisition of Splunk. Robbins also mentions that the company has passed the antitrust review period in the U.S. and received positive feedback on their portfolio at a recent Partner Summit. He concludes by reaffirming the company's commitment to delivering value to shareholders through operating leverage, capital allocation, and expense management.

The next quarterly call for Cisco, reflecting their fiscal year 2024 second quarter results, will be on February 14, 2024 at 1:30 p.m. Pacific Time. The call concludes with an invitation to contact Cisco's Investor Relations department for any further questions and information on how to listen to the call in its entirety. The operator thanks participants for joining and the call ends.

This summary was generated with AI and may contain some inaccuracies.