Preparing for Cisco’s Q4 2024 Earnings: 5 Key Takeaways

On Wednesday, Cisco Systems will report its earnings for the fourth quarter, which ended on July 27. The report will likely include updates on:

• Opportunities in artificial intelligence
• Changes in Splunk and its security offerings
• Impact of cloud demand

Cisco, based in San Jose, California, will cover these topics in their latest quarterly results.

Cisco Q4 2024 Earnings :

On Wednesday, Cisco will hold its first earnings call since announcing it will lay off about 4,000 employees. This is similar to the number of layoffs the company made in February. With around 85,000 employees in July 2023, this new cut will reduce Cisco’s workforce to just over 80,000.

During the call, analysts may ask Cisco Chair and CEO Chuck Robbins about the impact of the economy, inflation, and interest rates. A July report from Morgan Stanley mentioned that the overall economy is affecting network spending, causing a slight decline in the second half of the year. Resellers are more optimistic about Cisco’s growth, expecting a small increase, while Wall Street predicts a slight decline.

Splunk Updates :

Analysts are expected to focus on several key areas during Cisco’s upcoming earnings call:

• Updates on Cisco’s Security Business: Analysts will be interested in hearing about Cisco’s security operations and any developments in its recently acquired Splunk business. Cisco bought Splunk in March.
• Splunk’s AI Assistant Security: August saw the launch of a private preview for Splunk’s AI Assistant Security. Cisco might share initial feedback on this new AI tool.
• CrowdStrike’s New Capabilities: A July report from KeyBanc noted that CrowdStrike has added security information and event management (SIEM) capabilities, making it more competitive with leading SIEM vendors like Splunk/Cisco and Palo Alto Networks, which don’t have their own managed SIEM solutions.
• Splunk’s Migration Incentives: KeyBanc’s June note mentioned that Splunk’s migration packages might pressure Palo Alto Networks to convert on-premises QRadar customers to its new XSIAM solution.
• New Security Innovations from Splunk: In June, Splunk announced new tools and innovations to improve threat detection, data management, and AI-driven tasks. Cisco and Splunk also introduced a Unified Observability Experience that integrates products from both companies.

Other Cisco Security Growth Areas :

KeyBanc’s Recent Survey Highlights Cisco’s Position in the Market

• Impact of Palo Alto Networks’ Discounts: About 20% of value-added resellers (VARs) named Cisco as one of the vendors most hurt by Palo Alto Networks’ discounting strategy, alongside Wiz.
• VARs’ Vendor Exposure: VARs expect to have less business with Cisco compared to other vendors. Check Point and Zscaler are the most favored, according to the survey.
• Performance Ratings: Only 13% of VARs said Cisco outperformed their expectations in the last quarter, a drop from previous results. Palo Alto Networks led with 39% and CrowdStrike followed with 35%.
• SASE Position: Cisco ranked third in the “best positioned” secure access service edge (SASE) vendors, with 29% of responses. Palo Alto Networks was first with 62%, overtaking Zscaler.
• Security Analytics Traction: Cisco tied for third place with Microsoft Sentinel in gaining traction with customers, receiving 23% of votes. Palo Alto Networks was first with 41%, followed by CrowdStrike at 36%.
• Endpoint Security Performance: Cisco ranked low for endpoint security, with only 9% of responses, a decline from previous quarters. CrowdStrike led with 50%, and SentinelOne was second with 41%.
• Future Outlook: A June Bank of America report predicted increased firewall demand for Cisco, Fortinet, and Palo Alto Networks in the coming quarters. While SASE is growing, Cisco and others are focusing on their platform benefits, while Zscaler may face challenges next year.

Networking, Communications, Inventory :

Morgan Stanley and KeyBanc Surveys: Cisco’s Position and Outlook

• Positive Outlook for Cisco: A July Morgan Stanley report predicts a strong second half of the year for Cisco. This is due to improved expectations around managing inventory and longer sales cycles.
• Budget Growth: The report notes a slight increase in communications budget growth expectations for 2024, now at 2.7%, up from 2.6% in early 2024. This increase follows two quarters of declines.
• Networking Upgrades: The survey indicates that resellers are seeing positive trends in networking upgrades and equipment replacements, suggesting increased investment.
• Inventory Concerns: Most resellers (89%) still have excess inventory that should be cleared within six months. This means inventory management will continue to be a challenge until 2025.
• Cisco’s Market Position: According to KeyBanc, Cisco remains the top performer among networking vendors, a position it has held for the past five quarters. However, its market share has slightly decreased, from 71% to 63%, while its main competitor, HPE, saw a drop from 48% to 37%.

Cisco AI Opportunities :

Key Points for Cisco’s Upcoming Earnings Call:

• AI Demand: Analysts will want to know how demand for artificial intelligence (AI) is impacting Cisco and when it might start generating significant revenue.
• Generative AI Spending: According to Morgan Stanley’s July report, Cisco is among the top five companies gaining from increased generative AI spending in 2024. However, its share is smaller compared to leaders like Microsoft (46%) and Amazon (6%). Cisco received only 1% of the responses.
• Future AI Spending: Cisco is also ranked fifth for expected generative AI spending over the next three years, with a 2% share. Microsoft leads with 46%.
• New AI Product: In June, Cisco introduced a new AI product in partnership with Nvidia: Cisco Nexus HyperFabric AI clusters for data centers.
• Current AI Orders: A June report from Melius Research indicates that Cisco has made $800 million in AI orders, but this is seen as modest for a company of its size. Cisco is expected to see more AI orders, potentially exceeding $2 billion by 2026 or 2027.

Cloud Growth :

Key Points on Cisco’s Cloud and AI Business:

• Cloud Adoption Impact: Analysts will likely examine how the growing interest in cloud technologies is affecting Cisco’s business.
• Hybrid Cloud Popularity: According to Morgan Stanley’s July report, Cisco is not a top choice for managing hybrid cloud environments, receiving only 2% of responses in a recent survey, which is on par with Dell and Nutanix but lower than Google and Hewlett Packard Enterprise. Microsoft is the leading vendor with 48%.
• IT Budget Impact: Cisco is ranked fifth in terms of expected loss of IT budget share due to cloud shifts in 2024, with a net loss of -6%, an improvement from -10% in the previous quarter. Vendors like NetApp, HPE, Oracle, and Dell fared worse.
• New Security Capabilities: In June, Cisco launched new features for Cisco Security Cloud, including the Cisco Firewall 1200 Series.
• Growth in Data Center Switching: A June report from Bank of America predicted strong growth for generative AI data center switching, with a 73.3% annual growth rate from 2023 to 2027. Cisco, along with Arista Networks, HPE, and Juniper, is expected to benefit from this trend. Arista leads in hyperscale cloud provider data center switching, while Cisco and HPE-Juniper have opportunities in enterprise and tier-2 cloud segments.
• Ethernet Switch Market: Bank of America highlighted that generative AI networking will significantly increase demand for 400G and 800G Ethernet switches. These segments are expected to grow from 21% of the $20.2 billion data center switching market in 2023 to over 53% by 2027, potentially reaching $13.4 billion in revenue. Arista leads in market share for these switches, while Cisco holds a small 3% share.
• Competitive Landscape: Melius Research noted that Arista is outperforming Cisco and Juniper in the enterprise and service provider sectors, although Cisco has a closer relationship with Nvidia.

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