How Does Cisco Make its Money?
Cisco Systems is the world’s largest networking equipment company and a major player in cybersecurity and enterprise software. For decades, Cisco’s routers and switches have formed the backbone of enterprise networks, data centers, and the internet itself. The company is now in the midst of a strategic transformation from a hardware-centric business to a recurring software and subscription model.
In March 2024, Cisco completed its largest-ever acquisition — buying cybersecurity company Splunk for $28 billion — to expand into security analytics and observability. This deal accelerated Cisco’s push toward software and recurring revenue, which now account for a growing majority of the business.
Revenue Breakdown
| Segment | FY2024 (Jul) | FY2023 (Jul) | YoY Growth |
|---|---|---|---|
| Networking | $28.0B | $32.1B | -12.8% |
| Security | $5.1B | $3.9B | +30.8% |
| Collaboration | $4.2B | $4.1B | +2.4% |
| Observability | $1.6B | $0.5B | +220.0% |
| Services | $14.2B | $13.8B | +2.9% |
| Total Revenue | $53.8B | $57.0B | -5.6% |
Networking — 52% of Revenue
Cisco’s core business: switches, routers, wireless access points (Wi-Fi 6/7), and software-defined networking products for enterprise campuses, data centers, and service providers. Revenue declined as customers digested the inventory they over-ordered during the supply chain crisis of 2021-2023. This is widely viewed as a cyclical normalization rather than structural decline. Cisco dominates enterprise networking with ~50% market share.
Security — 9% of Revenue
Growing rapidly, now boosted by the Splunk acquisition. Includes firewalls, zero-trust access (Duo), extended detection and response (XDR), email security, and Splunk’s security information and event management (SIEM) platform. Security is a strategic priority and acquisition target for Cisco.
Collaboration — 8% of Revenue
Webex (video conferencing and collaboration), unified communications, and contact center solutions. A stable but mature segment facing stiff competition from Microsoft Teams and Zoom.
Observability — 3% of Revenue
A new segment created after the Splunk acquisition. Includes Splunk’s data analytics platform, AppDynamics (application performance monitoring), and ThousandEyes (internet/cloud monitoring). Observability is a fast-growing market as enterprises need visibility into increasingly complex hybrid and multi-cloud environments.
Services — 26% of Revenue
Technical support, consulting, and managed services. This is a highly recurring, high-margin business that provides ongoing support for Cisco’s massive installed base. Essentially a maintenance and professional services annuity.
Income Statement Overview
| Metric | FY2024 | FY2023 |
|---|---|---|
| Total Revenue | $53.8B | $57.0B |
| Cost of Revenue | $21.0B | $22.1B |
| Gross Profit | $32.8B | $34.9B |
| Operating Expenses | $20.2B | $18.4B |
| Operating Income | $12.6B | $16.5B |
| Net Income | $10.3B | $12.6B |
Key Financial Metrics
- Gross Margin: 61.0% — Strong and improving over time as software and subscriptions become a larger revenue mix. Hardware-only margins are lower (~55%) while software margins exceed 80%.
- Operating Margin: 23.4% — Compressed by Splunk acquisition costs and integration expenses. Underlying operating margin remains in the mid-30s on a non-GAAP basis.
- Revenue Growth: -5.6% — The decline is almost entirely cyclical, driven by networking inventory digestion. The underlying business (especially software ARR) is growing double digits.
- Annual Recurring Revenue (ARR): $29.4B — Up 22%, now exceeding 50% of total revenue. This is the key metric as Cisco transforms into a subscription business.
- Dividend Yield: ~3.3% — Cisco returns substantial capital through dividends and buybacks. It has increased its dividend for 13 consecutive years.
What to Watch
- Networking recovery — As customers finish digesting excess inventory, networking orders should recover. The timing and strength of this rebound is the most important near-term catalyst.
- Splunk integration — Cisco needs to cross-sell Splunk’s observability and security analytics to its massive networking customer base. Successful integration could create significant revenue synergies beyond the standalone Splunk business.
- AI networking opportunity — Building AI data centers requires advanced networking equipment (400G/800G switches, optics). Cisco is investing in this space and could benefit from the AI infrastructure buildout.
- Software and subscription transition — Reaching the tipping point where more than half of revenue is recurring changes how Wall Street values the stock. Cisco’s path to 60-70% recurring revenue would warrant a higher valuation multiple.
- Security consolidation — Cisco is assembling a comprehensive security portfolio (firewall, XDR, SIEM, zero trust, email). If it can compete effectively against Palo Alto Networks and CrowdStrike, the security segment could become a major growth driver.