Last week Cisco announced its quarterly results. I won’t rehash the numbers as Diana Goovaerts covered it in this post. Cisco did report a solid beat on the top and bottom lines, which I believe was its 10th consecutive quarter of beating on both metrics. The company did guide up on revenue for its Q4, but EPS was light based on margins being squeezed on near term supply chain issues from the on-going chip shortage. Without this last hiccup, this would have been one of the cleanest quarters for Cisco in quite some time.
Despite the obvious “chip shortage will impact the near-term outlook,” there were a number of key takeaways from Cisco’s quarter that are worth highlighting.
1. Companies are planning to head back to work soon. The vaccine rollout and lower COVID numbers have enabled most states to put together reopening plans. This has caused a number of companies to look to bring back employees, at least part time. This has created a spending resurgence as companies look to upgrade older infrastructure and complete projects that were put on hold. Overall product growth came in at 10% year-over-year, which is the highest rate in over a decade. The company saw broad based demand across its product areas including Infrastructure Platforms up 6% (Cat 9K double digit growth), management noted routing and Wi-Fi (include Meraki) saw strong demand from refresh opportunities. Cisco also noted continued strength in security, which was up 13% year-over-year with Umbrella and Duo being noted. Lastly, application revenue was up 5%, which was fueled by double digit growth in its Webex suite. Cisco has had the role of “industry bellwether” for some time so increased order growth for it should be good news for the tech sector.
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2. Cisco is a major software company. One of the more surprising data points given on the call last week was that Cisco’s software revenue was $3.8 billion and is now at $14 billion annually. The company did provide a bit of detail of how the revenue is calculated. Of the $3.8 billion, $1.4 billion comes from the “apps” business unit, which is Webex, AppDynamics and Internet of Things software. The other $2.4 billion comes from security software, network management and its IOS operating system. The $14 billion number makes Cisco the 6th largest software company with only Microsoft, Salesforce, Oracle, ADP and SAP being bigger. That makes Cisco software bigger than VMware, Workday, Intuit and other software providers. Five years ago, this certainly wasn’t the case, but CEO Chuck Robbins made a commitment to turn Cisco into a bigger software vendor, and he’s certainly made good on that.
3. Cisco is innovating in the area of networking. I’ve been watching Cisco in my analyst role now for 20 years, and in that time I’ve heard a steady drumbeat of “the network is being commoditized” and “Cisco is no longer innovating in the network.” There is some logic to the commoditization theory as networking is a very mature market, and one would expect to see gross margins fall. In fairness to the critics of Cisco, the company did appear to be heading that way. I recall one quarter, pre-Robbins, when Cisco product gross margins fell under 60% for the first time in its history and some financial analysts were predicting that was the beginning of the end. Since then, gross margins have steadily grown.
This quarter, on a GAAP basis, product gross margins were 62.6%, slightly down from the 63.7% of 2020 but still near the high end of the network industry.
The reality is, there is still a tremendous amount of innovation to come in networking, particularly with artificial intelligence making intent based-networking a reality. I fully expect to see product gross margins continue to be in the low to mid 60% enabling Cisco to stave off commoditization.
4. Webex is alive and kicking as evidenced by the year over year double digital growth. The pandemic had a profound impact on the collaboration market and made rival Zoom, a household name. There was a tremendous amount of industry chatter that Webex was long past its prime, and some even called the product dead. I do think Zoom’s success and the rise of other upstarts, such a RingCentral and Five9 kicked Cisco into high gear regarding Webex innovation. Over the past couple of years Cisco has loaded the product up with new features, slick new devices to address the hybrid workplace and made a number of acquisitions including IMImobile (contact center), Socio Labs (events), Slido (audience interaction), Babble Labs (conversational AI), Cloud Cherry (customer engagement) and Voicea (contact center).
Additionally, the marketing team of Webex has been very active with new partnerships such as McLaren Racing and the PGA of Australia, which raises brand awareness. Cisco Collaboration also created a new event, WebexOne, dedicated to all things Webex. Additionally, the logo has changed, new and brighter colors are now being used and there has been increased activity in advertising.
5. Near term headwinds remain. While it’s true that Cisco is an execution machine, the company may face a bumpy next couple of quarters. Robbins has been very vocal about the on-going chip shortage, and this will likely create supply problem, order delays and could cause Cisco to either raise prices to offset pricing, shipping and other costs related to the situation. Alternatively, Cisco could hold pricing and see gross margins temporarily impacted. For a company of Cisco’s size, it goes as the market goes, and there are a number of global, macro-economic issues that could cause some bumps throughout the rest of the calendar year.
Zeus Kerravala is the founder and principal analyst with ZK Research. He provides a mix of tactical advice to help his clients in the current business climate and long-term strategic advice. Kerravala provides research and advice to end-user IT and network managers, vendors of IT hardware, software and services and the financial community looking to invest in the companies that he covers. He can be reached at [email protected], and follow him @zkerravala and on YouTube.
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.