Ever wondered what equipment the bits and bytes of the internet travel on once they leave the computer? It is called networking equipment, and Cisco Systems is one of the manufacturers of those. The company Is currently a market leader, though there are other competitors creeping up.
Cisco is based out of San Jose and is a tech conglomerate that manufactures and sells networking hardware and software, as well as telecommunications equipment and other technological services. It currently holds a market share of 37% in enterprise network infrastructure market followed by Huawei, and Juniper, at 28% and 24% respectively.
Here are eight things I learned from Cisco’s Q1 2023 earnings call:
Performance
- Revenue-wise, Q1 was Cisco’s strongest ever. Revenue clocked in at US$13.6 billion up 6% y/y. The major contribution was sales of products, which brought in a revenue of US$10.2 billion, up 8% y/y. The service revenue was flat. In terms of product orders in Q1, Cisco recorded its second-highest Q1 orders in history.
- Non-GAAP operating margin was 31.8%, down 1.5%. The decrease was primarily driven by both component costs, as well as higher freight and logistics costs related to supply constraints. This was partially offset by strong positive pricing impact, as well as some benefits from product mix.
- Non-GAAP net income was US$3.5 billion, up 2% y/y and non-GAAP EPS was US$0.86, up 5%. Operating cash flow for the quarter was US$5 billion, up 16% year over year.
Shareholder Returns
- US$2.1 billion was returned to shareholders during the quarter, comprising of US$1.6 billion in quarterly cash dividends and approximately US$500 million in share repurchases. This is in line with the long-term objective of returning a minimum of 50% of free cash flow annually to shareholders.
Guidelines
- Financial guidance for Q2 – revenue growth is expected to be in the range of 4.5% to 6.5%. Non-GAAP gross margins are estimated to be between 63% to 64% while operating margins to be in the range of 31.5% to 32.5%. The earnings per share is expected to range from $0.84 to $0.86.
As for fiscal year ’23, growth is expected to be in the range of 4.5% to 6.5% y/y – up from the prior range of 4% to 6% growth. EPS is expected to range from US$3.51 to US$3.58, up 4.5% to 6.5% year on year.
- CEO Chuck Robbins is optimistic about Europe going forward. Europe is being impacted by the energy cost and forcing companies to look where they spend their dollars. Customers are trying to solve this energy cost issue in a very aggressive way and there are several Cisco technologies that can help them do that, including Silicon One technology, which powers their networks at much lower power consumption.
Questions & Answers
- An analyst was concerned about the impact of foreign exchange, with the US dollar at 20-year highs. 90% of the company’s revenue is denominated in USD, as per the CFO, Scott Herren. So there is not much translation impact. What is left gets offset by translation savings on the cost side. So, FX from a translation standpoint really hasn’t had a material impact.
- Due to the current world semiconductor shortage, lead times for Cisco switches are extremely lengthy, and Cisco had back orders totalling $15.9 billion last quarter. As such an analyst questioned about the lead time. The CEO mentioned that some products still have component issues, which would take at least another quarter to get resolved. However, some products like firewalls are down to three-week lead times. Some other products have been re-designed, and will reduce the lead time from 40 weeks to 12 weeks. Improvements have been made in roughly half of the portfolio and will be continued to do so.
- An analyst was concerned about restructuring plans in some of the businesses and the impact on the top line. According to the CEO, some rightsizing is taking place. Enterprise networking space is being beefed up, and significant investment in security is taking place. Even in the areas that are being right-sized, there is significant potential in the calling business and cloud calling business.