This week Cisco posted solid Q4 Fiscal 2021 results. The company ended its fiscal 2021 with strong performance, highlighted by revenues of $13.1B, up 8.8%, which was also $87M ahead of Street expectations.
About 2.1% of the growth came from acquisitions, most notably IMImobile and Acacia, resulting in 6.7% of organic growth, which is certainly impressive for a company of Cisco’s size, $49.8B to be exact for FY22 and the current uncertain macro. Its Non-GAAP EPS of $0.84 beat estimates by $0.01 and GAAP EPS of $0.71 beat by $0.02.
Cisco Guidance Looking Forward
Looking ahead, Cisco guided to Q1FY22 revenue of 7.5% to 9.5% year-over-year growth, the midpoint of which is $115M ahead of Street estimates.
More important, for the first time in history, Cisco provided full year guidance. It is estimating 5%-7% revenue growth, which is about $848M ahead of estimates at the midpoint of that range. The full year guide is meaningful as it shows Cisco’s confidence in the business despite the current global macro issues.
While the top line is interesting, it’s always worth taking a closer look at some of the details behind the numbers. Below are the ones that are most meaningful.
- Continued shift to a software company. In a quarter filled with notable data points, the one that stood out the most to me was that Cisco had achieved $4B in software revenue in Q4. This is a YoY increase of 6% but subscription revenue was up 9%. FY21 software revenue was $15B, which equates to 7% YoY growth with subscription revenue up 15% in that time frame. This is the most significant change to Cisco’s business in the Chuck Robbins era. The company had talked the software talk in years past but had not fully committed and now it appears it has. An interesting point on its current software run rate: at $15-$16B, Cisco is now the 4th largest software company in the world, slightly ahead of Adobe and only behind Salesforce, Oracle and Microsoft.
- Product order growth of 31%. This was the largest YoY growth in products for Cisco in a decade, although it was against easy comparable as last year the company saw a 10% decline as the world had just shut down. This number was good to see though as Cisco did not just recover, it came roaring back to pass where it had been. Much of this demand is from businesses modernizing their infrastructure to accommodate indefinite hybrid work. Technology plays a key role in enabling companies to work differently – but much of it needs an upgrade in any case.
- Growth driven by Cisco’s core products. In the past, Cisco had certain quarters where growth was robust, which was driven by a couple products. This wasn’t the case this quarter, as the company saw growth across most of its products, including its core infrastructure platforms, which represented 78% of product revenue for the quarter. The infrastructure platforms segment, which includes Catalyst 9K, WiFi and routing grew 13%. One of the notable points: sales to webscale companies jumped 160%. This is an area that Cisco has historically been weaker in but the company has been dedicating in refreshing the portfolio here. Other drivers of infrastructure growth include 5G, 400 Gig and WiFi 6E. The only product to decline in this segment is data center, as the server market continues to contract.
- Security was up only 1% But this was one of the few product areas that saw a jump in spend last year so comparables are much tougher as is the competitive landscape. The Applications group saw a 1% decline but that should be expected as collaboration transitions to the cloud. Legacy VoIP and telepresence declined, which offset strong growth by Webex, IoT and AppDynamics. Over time the recurring revenue growth of software will overtake the decline in VoIP and telepresence.
- Services was up 3% This is now 26% of Cisco’s overall business. The services group plays a key role in the Cisco’s ability to sell higher margin portfolio sales that are linked to business outcomes.
- Broad geographic and customer segment growth. Looking at geographies, Americas growth was 34%, EMEA grew 24% and APJ 29%. By customer segment, public sector jumped 22%, commercial 41%, service provider 40% and enterprise 25%. The enterprise growth was a significant shot in the arm as it had flatted out in previous quarters.
Cisco still faces challenges
Despite the positive quarter, there are some factors that are acting as headwinds that will temper Cisco’s growth.
The biggest issue is component availability driven by the global chip shortage. Many of the Cisco resellers I have talked to have told me that many products are seeing extended lead times, which is holding up sales and, in some cases, causing them to lose some deals.
It’s important to note that this isn’t limited to Cisco as the entire network segment is being impacted. Given Cisco is, by far, the biggest network vendor, it’s the most impacted. On the earnings call, Cisco management stated they expects supply issues to carry into 2022. The impact of this is that demand will likely be greater than the supply Cisco has available. As supply chain issues get resolved, I would expect to see Cisco’s growth uptick.
Also, the competitive landscape around Cisco continues to get tougher. A decade ago, Cisco’s competitors were names like 3Com and Nortel, and Cisco could out execute those companies with little effort. Today, because the network has become more important, it gained much more interest from a broader set of companies. VMware, Arista, Palo Alto Networks as well as the cloud companies are now network companies.
The other enterprise network vendors, Juniper, Extreme and HPE Aruba, have all been busy revamping their portfolios with acquisitions. In the area of collaboration, Cisco is fighting Microsoft, Zoom, RingCentral and others. Ultimately, the stronger group of competitors has caused Cisco to move faster and I expect this rate of innovation to continue, which is obviously good for customers.
