The Six Five team discusses Cisco Q2 FY2024 Earnings.
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Transcript:
Patrick Moorhead: Yeah, Cisco did Q2 FY 2024. They announced some layoffs. Dan, what’s going on here?
Daniel Newman: Well, so it’s kind of one of those, the devil’s in the guide. The actual results again, were good. When you say a beat on both the top and the bottom line, and they did do that. But what’s the attention drawn to? Well, the attention was drawn to a second consecutive quarter of software guide, which Pat, that’s indicative. I mean, Cisco is a bellwether of the IT industry. And when Cisco is saying they’re slowing, there is some concern.
And Pat, you and I have shared stages, and we’ve talked about this in public, and I don’t think we’ll change directions on this, is IT spend is not growing. Our data is pretty emphatic about that. So while we’ve got all this enthusiasm and excitement, what’s happening is all the budget that traditionally went to other parts of the IT stack, it’s being reallocated. And so companies that have a smaller AI play are at risk right now. And Cisco has a substantial AI play from a picks and axes standpoint. Their software growth has been meaningful. The Splunk acquisition definitely brings them deeper into that sort of “all roads go through Cisco”.
And on a really positive note, and I put this out into the Twittersphere to a pretty good reaction, is despite lowering guidance and resetting expectations to some extent, there was one data point that I just absolutely loved in the Cisco number this quarter, and that’s 50% of its business now is subscription. 50% of its revenue, and it did 12.79 billion in revenue this quarter, that means $6 billion+ in the quarter was subscription revenue. That’s a massive turn. We spent time, I think a year ago we were with Chuck Robbins at MWC, and one of the big topics of that conversation was all about the pivot. The company’s very aggressively, over the last several quarters, seen its revenue jettisoned from where it was to almost to the 50% number. So that was a number that I’ve been looking at for a long time.
You kind of go through the pieces, and it looks kind of strained everywhere. Where it was growing, it was single digits, where it was contracting, it was single digits. It wasn’t like there was a part of the business that you could look at and be like, “Oh, that was the reason that this number slowed.” It was sort of across the board. But one thing, Pat, and this is really an interesting sort of inflection as it relates to what does the market like, and job cuts, the market likes right now. And I know it seems-
Patrick Moorhead: Has the market ever not liked job cuts?
Daniel Newman: Well, so I’ve never seen it quite do as much for the stock upside as I’ve seen in the last couple of years. I mean, you look at Meta, I mean they absolutely were getting crushed because just people had started to lose faith in the company’s ability to be profitable while it was trying to innovate. Well, right now, I mean, look, these companies are coming out, they’re coming out bold and they’re making cuts. 5% is a lot, it’s over 4,000 jobs, and you never want to take these kinds of cuts and make light of them. It’s very important. These are people’s livelihoods and people’s careers, and so it’s very sad.
But, you know, CNBC shared the number, Pat, that there’s been about a 144 tech companies last just year to date, and almost 35,000 workers. So there’s this whole “everything’s great in the economy” BS. But the truth is I feel like a few companies are sort of propping the entire market up right now, and it’s almost entirely AI driven. And so every company on the planet right now that doesn’t have a strong attachment to the AI growth story is struggling. And Cisco is a great company that has a lot of AI, but still is not able to make the transition with the implementations and integrations as quickly. And it needs to reduce its cost to make sure it can deliver on its promise to its shareholders, which is always a very tough predicament to be in.
Patrick Moorhead: Yeah, I like to separate company-inflicted wounds and market-inflicted wounds. And I put this clearly in the market. The only thing I can’t fully get around is the quote, and I’ll quote Chuck here, “Customers have been taking time since the start of our fiscal ’24 to deploy elevated levels of product shipped to them in recent quarters, and this is taking longer than our initial expectations.” So basically, hardware was put in there, but them getting it up and running, which would drive more demand later, and by the way, we see this with the hyper-scalers, so I don’t fully understand that. What I 100% understand, though, is weak demand with our cable and telco and cable service provider customers. The entire industry is down with that. And Chuck said it’s going to take one to two quarters to burn down that interview.
I was super impressed with Splunk on the call. They said that expected to add $4 billion in an incremental ARR. I love this acquisition. I love cross-cloud capabilities that Cisco has been investing in, because quite frankly, regardless of whose networking and whose compute you use or where it’s at in the cloud, private cloud, on prem, they still make money on it. Some other good stuff is that Meraki, they’re seeing faster revenue growth in wireless slowing and switching. And many times that’s a precursor to what equipment has been installed. In fact, wireless orders were up 50% of deals over a million dollars sequential. I think that’s big. Other areas that aren’t necessarily reliant on the network, security and collab, they both saw double-digit growth. And probably the one thing that surprised me the most, and I really need to do the double-click on this, it said three out of the four top hyper-scalers are deploying ethernet AI fabric.
Now, they use web scale. And I’m just thinking that must be hyper-scale, but I need to go back and do that. So net, net, I think this is a momentary blip here, especially for service providers. Continue to be impressed with the cross-cloud service capabilities that aren’t necessarily reliant on the network. The company does need to figure out why that equipment took longer to install.
