Networking giant benefits from easing supply constraints, but recurring revenue base is also rising
By Dan Gallagher from the Wall Street Journal.
Feb. 16, 2023
Cisco CSCO -0.43%decrease; red down pointing triangle Systems delivered strong results Wednesday for its second quarter ended Jan. 28. Revenue rose nearly 7 % year over year to USD 13.6 billion, while adjusted operating income hit USD 4.4 billion. Both were a little above Wall Street’s consensus forecast. But Cisco also projected a jump in revenue growth for the third quarter, while also boosting its forecast for the full fiscal year ending in July. The company now expects full-year growth between 9 % and 10.5 %, compared with the 4.5 % – 6.5 % range it was projecting just three months ago.
Cisco hasn’t grown annual revenue by double digits since 2010, so the prospect of finally doing so again initially excited investors, sending the stock up 8 % in after-hours trading after the results hit the wire. But enthusiasm waned a bit during the subsequent conference call as the company reminded listeners that some of the projected growth essentially will be catch-up from orders it was unable to fulfil due to the sharp supply constraints that began hitting the business hard last year. The stock was up only around 3% by the time the call ended.
Backfilling orders may not be exciting, but Cisco still isn’t in a bad spot. The company has slowly been moving its business away from dependency on hardware such as network routers and switches; software now accounts for 30 % of its trailing 12-month revenue. It is also no longer shut out of serving the cloud-computing giants that like designing their own gear to power their massive data centres. Cisco Chief Executive Officer Chuck Robbins said on Wednesday’s call that the company’s “web scale” business unit that serves this segment has gone “from effectively zero into a multibillion-dollar run rate business” over the past few years. He also noted that two of the largest customers of this segment grew their orders with Cisco by more than 40 % during the past two quarters.
Clearing its backlog also isn’t going to be a quick affair. Chief Financial Officer Scott Herren noted on the call that Cisco expects to exit from the current fiscal year in July with a backlog “roughly double” its normal level. Analyst Samik Chatterjee of J.P. Morgan says that “would imply strong growth for FY24 from backlog normalisation alone.” Fat backlogs can mask deterioration in demand, though; Cisco noted that product orders fell 22 % year over year in the recent quarter. But that comes against a tough comparison of 34 % growth in the same period last year.
“It makes sense that customers work down backlog balances given the nature of the business,” noted Simon Leopold of Raymond James.
And even with a 5 % pop Thursday morning, Cisco’s stock price is undemanding at around 13 times forward earnings, which is the lowest valuation among megacap tech companies and a 51 % discount to the Nasdaq Composite, according to FactSet. At that price, riding out the backlog clearance to see how demand looks on the other side isn’t such a gamble.
Appeared in the February 17, 2023, print edition as ‘Cisco’s Catch-Up Is Worth It’.