What explains Cisco's operating profit drop in 2024?

Cisco's operating profit drop in 2024 can be attributed to a combination of factors:

1. Revenue Decline: Cisco reported a 5.6% decrease in total revenue for the year 2024, amounting to $53.8 billion. This decline, although in line with expectations, contributed to the overall profitability reduction. The revenue drop was primarily due to lower sales in the Networking segment, which fell by 12%, while other segments like Security, Collaboration, and Observability experienced growth.
2. Gross Margin Impact: The company's gross margin improved to 67.9% in Q4 2024, which is the highest in 20 years. However, the full-year gross margin for 2024 was 67.5%, indicating that the improvement was more notable in the fourth quarter. This suggests that the drop in operating profit may not be solely attributed to gross margin issues but rather to how these margins are influenced by revenue and operational efficiency across the year.
3. Operating Expenses: Specific data on operating expenses for 2024 is not available. However, the company's net income margin stood at 19.18% for the year, which is a notable figure. Without detailed information on operating expenses, it's challenging to dissect the factors contributing to the operating profit drop. Yet, it's clear that the revenue decline and its impact on overall profitability are significant factors.
4. Strategic Acquisitions: Cisco's acquisition of Splunk, completed in March 2024, had an immediate impact on profitability. The acquisition contributed to the revenue but also brought additional costs that affected earnings. Such acquisitions often require integration efforts that can temporarily strain profitability.
5. Market Conditions and Competitive Pressures: The technology sector is highly competitive, and Cisco faces challenges from both established players and new entrants. The company's operating profit drop may also reflect broader market conditions, such as cautious enterprise spending and the impact of economic uncertainty.

In summary, Cisco's operating profit drop in 2024 is a multifaceted issue influenced by revenue decline, particularly in the Networking segment, the need for integration following acquisitions, and broader market conditions. The company's gross margin improvements in specific quarters highlight operational efficiency challenges that need to be addressed for sustained profitability.