WTF is 'deployment phasing'? One reason Cisco revenue just went backwards, is what

Splunk deal may close early, but AI is a way off turning into a money fountain. Meanwhile, Cisco waits for you to finish projects

Cisco has delivered mixed news to investors after its customers yet again struggled to deploy products they've already acquired.

On the upside, Cisco's $12.8 billion of revenue for Q2 2024 was at the high end of its guidance, margins topped expectations, dividends were increased, and the acquisition of Splunk looks set to conclude in Q2 of calendar 2024 – a quarter ahead of schedule.

But that revenue figure was down six percent year-over-year, net income fell five percent to $2.6 billion, and earnings per share dropped by three percent.

CEO Chuck Robbins attributed at least some of those troubles to "customers … taking time since the start of our fiscal 2024 to deploy the elevated levels of products shipped to them in recent quarters and this is taking longer than our initial expectations."

The problem is acute among enterprise customers, service providers, and cloud providers. "We think they've got probably in excess of 20-plus weeks of inventory that they're working through right now," Robbins speculated.

This is a hangover from COVID, as Cisco's supply chain strained during the pandemic and deliveries were delayed. While the network behemoth eventually managed to deliver all the kit it had sold, many customers had prioritized other projects while they waited for networking boxes to arrive. Cisco flagged this as a problem last year, and clearly it hasn't gone away.

Telco and cable network operators are proving especially difficult.

"This industry has seen significant pressure, and they are adjusting deployment phasing, which is weighing on our business outlook," Robbins said.

Overall economic uncertainty isn't helping either. Even the geopolitics of the Middle East is a factor: CFO Scott Herren mentioned sea freighters' decision to avoid the Red Sea as having increased Cisco's costs.

Financial analysts on Cisco's earnings call had questions about the networking giant's recent collaboration with Nvidia and were clearly keen to understand how it plans to cash in on AI.

In his prepared remarks, Robbins told investors that "While there is tremendous opportunity ahead, we are still in the early stages of adoption of AI workloads."

That opportunity, he later added, is coming into view. "Over the last 90 days, we began to see the pipeline for AI use cases in the enterprise begin to emerge," he said.

"And there's heavy work going on in financial services. I would say it's early in what they're trying to think through, but we are seeing opportunities arise." He rated that chatter as "not enough for me to translate this to a massive trend, but there were some comments from some of our field teams that they see customers holding budget back just to be ready to extend it on AI once they get their strategy fully baked."

Another issue raised by analysts was HPE's imminent acquisition of Juniper. Again, Robbins said it's too early to make firm predictions, but he did note that wireless networks are Cisco's biggest overlap with HPE.

"I don't know if there's any connection to the fact that we had a 50 percent increase in $1 million-plus wireless deals sequentially," he dangled.

Robbins was pleased with Cisco's security sales, and the 16 percent year-on-year growth in revenue from observability products. But observability is the smallest of the four product categories for which Cisco reports revenue: its $188 million for the quarter was well behind the $7.1 billion for networking, $973 million for security, and $989 million for collaboration. For what it's worth, Cisco is currently emphasizing observability in communications with The Register, talking up its contributions to security, smooth IT ops, and delivering satisfying digital experiences.

Guidance for Q3 was set at $12.1 billion to $12.3 billion of revenue, and full year revenue was suggested as falling between $51.5 billion to $52.5 billion. The latter is well down from the $53.8 billion to $55.0 billion Cisco predicted when announcing its Q1 results.

So hurry up and install that Cisco kit you haven't taken out of the box yet, will you please? ®

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