Cisco’s Earning-zzzzz: Revenue Grows, Orders Shrink


By: R. Scott Raynovich

For those looking for deep insight into the IT and technology macroeconomy, there wasn’t a lot to grab onto in the Cisco earnings (announced Wednesday after market close), which were good enough to meet Wall St. estimates but not enough to get investors too excited, as the stock was flat.

Cisco’s earnings were fine, if unspectacular. Cisco beat analyst estimates and raised its forecast for the second half of its fiscal year 2023, increasing guidance to 10% to 10.5% revenue growth, from 9% to 10.5%, and EPS to $3.80-$3.82 from $3.73 to $3.78 (Cisco’s fiscal year ends in July). However, the company reported a huge plunge in new orders – down 23% year-over-year.

Shrinking Orders Raise Doubts

On the macroeconomic front, many investors and industry insiders look to Cisco's role as a bellwether indicator for the technology sector. While revenue growth has been slightly boosted, orders dropped, which can lead to head-scratching. That may be why trading in Cisco's shares was mixed today, with the company oscillating between the red and the green.

What’s perplexing Cisco investors is figuring out the future, as the conundrum of revenue growth and shrinking orders indicates a possible revenue bubble created by last year’s backlog from supply-chain delays. Cisco has undergone a volatile two years, as revenue growth has been on a roller coaster created by supply-chain delays, with many frustrated customers unable to get delivery of products in 2022 due to component shortages. Earlier this year, Cisco’s revenue growth resumed as the supply-chain loosened up and it was able to start filling a substantial backlog. Still, rival companies continue to take market share in key markets such as datacenter networking.

Cisco has also been battered by an embarrassing product glitch in its vEdge (Viptela) software-defined wide-area networking (SD-WAN) equipment, which has been plagued by certificate authority (CA) issues. But the company has been downplaying this issue and did not mention it on the conference call, implying that it's not material to financials.

Wall St. Analysts Are Mixed on Cisco

Analysts' takes on Cisco were mixed, as Wall St. tries to tackle the problem of dropping orders. Here’s what Rosenblatt Securities analyst Mike Genovese had to say:

“We are positive on the networking industry, and see Cisco as a share loser and more macro sensitive than most. The company's FY23 beat is not surprising because supply is improving. The industry is seeing weak orders now, however, due to digestion of recently increased shipments and the reduction in lead times and customer need to place early orders. There are also macro issues, but we believe these are not actually that bad.”

Jason Ader, an analyst with William Blair, was a little more circumspect in a research note published early this morning:

Despite Cisco continuing to benefit from backlog drawdowns—normalization expected mid-fiscal 2024—we remain concerned about the organic demand trends for the company. As we have noted previously, the feedback from our VAR checks on Cisco remain generally downbeat (concerns of Cisco fatigue and share losses). Though we acknowledge Cisco could benefit from generative AI tailwinds (across switching, routing, chips, and optics), we remain apprehensive about Cisco’s weakening competitive positioning across various segments (including networking, security, and collaboration).

The bottom line? Cisco did not provide any further clarity to a confusing macroeconomic environment. The business climate has been slowing with rising interest rates, slowing capital spending from cloud and service providers, and fears of a recession. With its slowing orders, Cisco did little to allay that.

CEO Robbins Sees Growth Ahead

Cisco CEO Chuck Robbins pointed to strong growth in software, which grew 18% y/y in the quarter. He expects Cisco to see growth in the security and networking markets boosted by AI spending.

Robbins seemed unconcerned about the drop in orders: “[O]ur order cancellation rates also remain well below historical levels, indicating the strength of our backlog and portfolio,” he said on the earnings call. "In terms of our backlog, we continue to expect that we will end the fiscal year with roughly double our normal product backlog.”

Cisco shares initially fell in after-hours trading after the news announced Wednesday but have since rebounded were trading unchanged in mid-day trading.