November 17, 2023
Analysts and Cisco executives say the 20% decline in Cisco product orders comes as channel partners work hard to implement products after a historic backlog.
Cisco in its fiscal year first quarter earnings earlier this week lowered its full-year guidance to between $53.8 billion and $55 billion. Previously the guidance had sat at between $57 billion and 58.2 billion. Chairman and CEO Chuck Robbins estimated that "an additional one to two quarters' worth of shipped orders" is sitting in the hands of customers and channel partners.
Cisco's Chuck Robbins
"This has near-term consequences for revenue, and our outlook for the next couple of quarters... " Robbins said in the call. "However, it does not change our longer-term confidence. We expect product order growth rates to increase in the second half of the fiscal year."
Cisco's stock immediately dropped from $53.2 to $48.1 following the call, a decline of 8.5%. At the same time, Cisco quarterly revenue rose 8% year-over-year to $14.7 billion. It was the highest Q1 revenue performance in the company's history.
Observability led the way with a 21% revenue growth to $190 million. Networking grew 10% to $8.8 billion in the quarter. After a decline in the previous quarter, the collaboration division saw a 3% growth to $1.1 billion.
Cybersecurity grew 4%.
Moreover, the vendor celebrated that software revenue and subscription revenue both grew 13%. Cisco, which has stated a goal of generating increasing recurring revenue through software and subscriptions, currently sits at an annualized ARR of $24.5 billion. That's a 5% gain.
Techaisle's Anurag Agrawal
Techaisle chief global analyst Anurag Agrawal noted that subscription revenue has grown to comprise 44% of total Cisco revenue.
"This indicates that Cisco is successfully transitioning its business to a subscription-based model, which is expected to drive long-term growth and recurring revenue," Agrawal told Channel Futures.
Agrawal noted an 11% growth in subscription revenue on the revenue side, 13% on the security side and 8% on the collaboration side.
Cisco subscription revenue growth sends a positive message for Cisco's long-term trajectory, Agrawal said.
"The subscription-based model is anticipated to offer Cisco a more predictable and recurring revenue stream, bolstering future profitability and growth," he said.
However, the lowered Cisco stock price may come from questions about Ciscoo's near-term growth prospects, he said. Those questions stem in part from the sheer breadth of Cisco's technology portfolio.
"Like all infrastructure suppliers, Cisco faces the challenge of delivering a cohesive end-to-end story. While Cisco offers a multitude of point solutions, the lack of a clear narrative on how these solutions interconnect remains a gap in its strategy," Agrawal said. "The company is being evaluated on the same criteria as hyperscalers, adding to its challenges. In summary, while Cisco’s subscription revenue growth bodes well for its future, near-term growth concerns and industry-wide challenges are areas the company needs to address."
Cisco Product Orders Decline
Those challenges have eased. Many of Cisco's publicly traded distributors, including ScanSource, reported major pull-through revenue late last year as their inventory began to fill up.
Now that inventory has gone into the hands of partners and customers, according to Robbins.
"Simply put, customers are now taking time to onboard and deploy these heightened product deliveries. While the macro challenges we have discussed still exist, we believe this implementation phase is the primary reason for the slowdown in new orders," Robbins said. "We saw it mostly with our larger enterprise, service provider, and cloud customers, and it was most pronounced in October."
Brent Kelly, Omdia's principal analyst for digital workplace, said he saw a similar trend play out a few quarters prior on Cisco's collaboration side. (Omdia and Channel Futures are sister companies.)
"There were a lot of people that ordered phones and other kinds of communications equipment, and there was there was a big backlog there. And then the manufacturing got kind of caught up, and the challenges with shortages due to COVID went away. In our industry the channel got stuffed," Kelly told Channel Futures. "So there was a big drop-off consequently in early part of 2023 for phones and other kinds of communications equipment because just the channels got stuffed and it had enough."
That challenge has appeared to impact other parts of the portfolio now, including Meraki, Kelly said.
However, Kelly said the challenge on the collaboration side "worked itself out" after a quarter or two.
He said that while partners are working hard on the deployments and implementation, they face a "shortage of talent" to help end users get the equipment up and running. He said partners may consider hiring or adding contractors to capitalize on the product orders.
In addition, some customers want to push pause on implementations until the holiday season has passed, Kelly said.
"Work through the backlog as fast as you can and work with your customers who are willing to install today," Kelly said. "If you've got some of those retail customers were going to put you off to the first of the year – that's fine. Find others who are ready to go now so that you can turn your inventory to money."
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