Cisco Earnings Highlight Shifting Market Climate

Cisco Hq

By: Mary Jander

Cisco (Nasdaq: CSCO) reported better-than-expected results for its first quarter of fiscal year 2023, citing loosening of supply chain constraints worldwide. At the same time, the vendor admitted tougher sales challenges abroad and acknowledged the need to restructure people and resources to meet changing market demands.

First, the results: Cisco reported $13.6 billion in revenue, up 6% year-over-year (y/y), and earnings per share (EPS) of 86 cents on net income of $3.5 billion. Wall Street had expected $13.3 billion in revenue and 84 cents EPS.

Executives credited an improved supply chain for loosening a backlog of hardware products – and software subscriptions attached to those products. The resulting revenue recognition enabled management to increase guidance for the new fiscal year. Revenues are now expected to grow 4.5% to 6.5% y/y compared to earlier guidance between 4% and 6%.

The company remains committed to transforming its past dependence on networking hardware by expanding its software and subscription services revenue. Total software revenue was $3.9 billion, up 5% y/y, with software subscription revenue (accounting for 85% of software sales) up 11%. Cisco now counts 43% of its revenue from subscriptions. Total subscription revenue was $5.9 billion, up 6%.

Segment Sales Mixed

Still, networking continues to be Cisco's bread and butter. Sales of the vendor’s enterprise switches, part of its Secure Agile Networks segment, grew 12% y/y. On the downside, sales of optical switching wares, part of Cisco’s Internet for the Future segment, were down 5%, and Collaboration products dipped 2%.

In areas where the vendor hopes to expand, such as security, signs were good: End-to-End Security product sales rose 9%, and cloud-native Optimized Application Experiences, including cloud-native network monitoring and automation solutions, was up 7%.

Cisco’s overall product sales rose 8% y/y and services revenue was flat.

Hyperscalers Head for Hardware

Cloud hyperscalers, a key customer segment for Cisco, are sustaining demand. “Once again, we saw strong momentum with our Silicon One-based Cisco 8000 routers, we are experiencing robust demand for our 400-gig products and now have nearly 1,200 customers,” said CEO Chuck Robbins on Cisco’s earnings call. “On a trailing 12-month basis, webscale orders were up double digits or greater for the eighth consecutive quarter. Network capacity demand continues to increase, driven by 5G, IoT, pervasive video, and other technology trends.”

... But Trouble in Europe

Despite the solid results, Cisco cited a few market downsides. “From a geographic perspective, we saw some emerging cautiousness in Europe,” said CEO Robbins. “This is driven by a dramatic increase in energy costs and market volatility, which is leading customers to assess their overall spend.”

But Robbins was quick to add that he sees the energy-oriented hesitation in Europe as an opportunity to peddle Cisco’s Internet of Things (IoT), Silicon One, and Power over Ethernet technologies. “[T]here’s a lot of positive tailwinds, notwithstanding the short-term dynamic environment that we're in,” he said.

Restructuring Ahead

Toward the end of the earnings call, Cisco execs acknowledged that part of a $600 million restructuring effort will involve layoffs. But they framed the situation as a rearranging of resources. “This really is a rebalancing,” said CFO Scott Herren. “As we look across the board, there are areas that we would like to invest in more…. Security, our move to platforms and more cloud-delivered products.”

The company will also be looking to downsize multiple remote branch offices that are sitting vacant with the growth of remote work.

At market close today, Cisco shares were trading at $46.59, up 2.20 (4.96%).