Cisco Sees Software, Supply Chain Wins in Latest Earnings

Cisco saw its software subscription revenue grow 15% last quarter, while supply chain issues eased for customers and partners.

The company drove revenues of $13.6 billion in the second quarter of its fiscal year 2023 (the quarter ended Jan. 28). Total revenue grew 7% year over year; product revenue grew 9%, while service revenue grew 2%.

Segmentation

Cisco’s networking segment led the way last quarter with $6.7 billion, up 14% from the previous quarter and up 13% on year-to-date.

Zeus Kerravala, principal analyst with ZK Research, said the strong results in networking didn’t surprise him, even considering the macroeconomic downturn.

ZK Research’s Zeus Kerravala

“We’re in a secular uptick for networking. There’s a lot of doom and gloom across tech companies laying people of, but if you look at the performance of the other network pure plays – Extreme, Arista, Juniper – they’ve all seen good quarters,” Kerravala told Channel Futures. “So it shouldn’t be a surprise to Cisco on the network side. They’re the 50% vendor though, so they benefit disproportionately.”

The company’s security segment grew 7% to $943 million. The application optimization group, which includes ThousandEyes, grew 11% to $199 million.

On the other hand, its internet of the future division declined 1% year over year ($1.3 billion).

Collaboration declined 10% to $958 million. Chief financial officer said Cisco saw declines for meetings and collaboration devices. Contact center, however, offset those declines. Cisco recently drastically expanded its base of partners that can sell CCaaS.

Kerravala said Cisco will succeed in collaboration if it can demonstrate the positive of linkage between different parts of is portfolio.

“I think the bigger question for Cisco is, can they use the power of their network install base to create a differentiated experience?” he said.

Software and Services

Cisco registered an annualized recurring revenue (ARR) of $23.3 billion, with product ARR growing 11%. Moreover, executives said total revenue stems 44% from recurring. Software subscription revenue increased 15%. Kerravala said he sees Cisco embracing the software model, as evidenced by the structure of its ELA agreements.

“We are probably still in the early innings of transitioning the traditional portfolio to subscription models,” Robbins said. “The team is working hard on that right now.”

Supply Chain

Cisco executives told analysts that backlog drew down 6% sequentially. However, total backlog still grew year over year, according to CEO and chairman Chuck Robbins.

“Combined with the aggressive actions our supply chain and engineering teams took to redesign hundreds of our products, we increased product deliveries and saw significant reductions in customer lead times. As our product deliveries increased, channel inventories also declined as our partners were able to complete customer projects,” Robbins said.

Cisco’s Scott Herren

Chief financial officer Scott Herren said order cancellation rate sit below pre-pandemic levels. Kerravala said he does not see Cisco customers cancelling orders due to supply chain problems. Rather, he said clients are taking patient approach.

“They’re not planning six-month projects. They’re planning 12-18 months out,” he said. “One of the questions that always comes up is, ‘How long is your backlog is normal?’ I don’t know if we’ll ever see it go back to normal. I think you might see Cisco carrying a backlog in the teens [long-term].”

Robbins said Cisco grew its enterprise and commercial business “in double digits sequentially.” Moreover, he said public sector performed above historical ranges.