Cisco Systems (CSCO) reported quarterly results on Wednesday that beat on the top and bottom lines. Even better: Management delivered a strong rebuttal to the bear case against the computer network equipment company. Revenue for the fiscal first quarter increased 6% year over year to $13.6 billion, beating estimates of $13.31 billion, according to Refinitiv. Adjusted quarterly earnings grew 5% year over year to 86 cents per share, beating estimates of $0.84, according to Refinitiv. Adjusted gross margin declined to 63.0%, slightly below estimates of 63.5%. Cisco’s adjusted operating margin was 31.8%, slightly below estimates of 32.1%. Bottom line We are pleased to see Cisco deliver a clean top and bottom line beat, including the greatest revenue growth in the company’s history. It was also great news to see management raise its outlook for its full year, signaling confidence in the company’s massive backlog (future revenue from orders received but not filled). With investor expectations low into the print, we think Cisco shares are deserving of the 4% pop we are seeing in after-hours trading. The bear case against the stock is that Cisco is essentially living off its backlog right now and as orders fall, the company will struggle to grow once the backlog converts to revenue. That’s not the story we are hearing tonight, and we think it could be a false narrative if Cisco’s business proves to be more resilient than what the market gives it credit for. Sure, orders are down year over year, but this is more the result of tough comparisons than a weak demand environment. It’s hard to predict where orders will land as the economy softens, but management believes it will still end the year with a backlog of 2 times to 3 times its historical level if orders fall 10% this year — and that’s not a forecast. When you combine Cisco’s massive backlog with software and subscription software becoming a larger part of the pie, we think it is easy to see why management is confident about its future. Guidance It was nice to see Cisco raise its full year revenue forecast of 4% to 6% growth year over year to 4.5% to 6.5%. This new view implies full year sales of $54.392 billion, which is higher than estimates of $54.144 billion and passes through this quarter’s beat and reflects no change in how management is viewing the second half of the year. Management also increased its earnings outlook for the full year, raising its range to $3.51 to $3.58 from $3.49 to $3.56. This new midpoint of $3.55 is slightly above the consensus of $3.52. For the second quarter of fiscal 2023, management expects revenue to grow 4.5% to 6.5% year over year. The midpoint of this guide implies revenue of $13.42 billion, which is higher than estimates of $13.244 billion. Adjusted operating margin is expected to be in the range of 31.5% to 32.5%, below estimates of 32.8%. Management expected adjusted earnings per share to be 84 cents to 86 cents, which at the midpoint of 85 cents is in line with consensus. Although we are yet to see price increases on products and greater software shipments provide the margin uplift we have been hoping for, part of the reason for this is that Cisco is shipping out its older backlog that was priced before pre increases went into effect. The good news is that Cisco is making progress on this and expects product margins to expand 50 to 75 basis points from where it currently stands by the end of the fiscal year. Companywide results Total product revenue increased 8% year over year to $10.245 billion, beating estimates of $9.88 billion. Cisco breaks down its product revenue into five main buckets: secure agile networks, collaboration, end-to-end security, internet for the future, and optimized applications experience. Secure agile networks — which includes sales of campus and data center switches (hardware used to connect devices within a network), enterprise routing, and wireless products — revenue increased 12% year over year to $6.684 billion, beating estimates of $6.179 billion. Collaboration — webex video conferencing and contact center — revenue fell 2% year over year to $1.086 billion, missing estimates of nearly $1.145 billion. End-to-end security (cybersecurity) revenue increased 9% year over year to $971 million, missing estimates of $1.014 billion. Internet for the future — routed optical networking, public 5G, and silicon — revenue fell 5% year over year to $1.31 billion, slightly missing estimates of $1.36 billion. Optimized applications experience — including some software as service-based offerings — revenue increased 7% year over year to $193 million, basically in line with estimates of $191 million. Services revenue was flat year over year at $3.387 billion, compared to estimates of $3.443 billion. Some other key items from the quarter we think are worth mentioning: Total product orders fell 14% year over year, but many analysts had expected a double-digit-percent decline, making the outcome here not all bad. But keep in mind, orders were up against growth of 34% last year. Ignoring the tough comparisons, this was the second-largest number of first-quarter orders in company history, behind only the quarter from a year ago. Meanwhile, the backlog remains very healthy. Okay, it was down 10% sequentially, but it wasn’t down because of customers canceling orders. In fact, Cisco said its cancellation rates remain below pre-pandemic levels, which is a good sign as it suggests demand for the company’s critical infrastructure remains strong despite the economic uncertainty. But the real reason why the backlog fell was that Cisco was finally able to convert some of its orders — especially its older ones — into revenue by increasing shipments. Total software revenue grew 5% year over year to $3.9 billion, with software subscription revenue up 11%, and 85% of software revenue subscription based. Annualized recurring revenue, or ARR, a subscription metric that represents the annualized revenue run-rate of active subscriptions, term licenses, and maintenance contracts, increased 7% to $23.2 billion. The RPO, which helps show how much future revenue is under contract, increased 3% year over year to $30.9 billion. The total short-term RPO, meaning revenue the company expects to recognize in the next 12 months, increased 3% to $16.4 billion. We keep a close eye on Cisco’s software metrics because they help us gauge the health of the business and the progress made on the company’s business transition from lumpy hardware sales (which are cyclical and a low price-to-earnings multiple business) to more subscription software (a higher-margin, more predictable revenue stream which are something investors are typically willing to pay a premium for.) Capital allocation and cash flow Cash flow from operating activities increased 16% year over year to $4.0 billion, a small beat versus estimates of $3.946 billion. The company spent roughly $500 million on buybacks, down from the $2.4 billion in the prior quarter. Still, the 12 million shares purchased at an average price of $43.76 per share looks solid compared to the stock’s roughly 5% jump above $46.60 this evening. The company has approximately $14.7 billion remaining in share repurchase program. (Jim Cramer’s Charitable Trust is long CSCO. 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Chuck Robbins, chief executive officer of Cisco Technologies Inc., speaks during a panel session on day three of the World Economic Forum in Davos, Switzerland, on May 25, 2022.
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Cisco Systems (CSCO) reported quarterly results on Wednesday that beat on the top and bottom lines. Even better: Management delivered a strong rebuttal to the bear case against the computer network equipment company.
