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Analysts: Cisco 'Bitten by Macro Issues' in Flat Q3 Earnings

"Order as early as you can, because I think these delays are going to carry on into 2024, maybe even 2025," one analyst told partners.

James Anderson

May 20, 2022

7 Min Read
complexity, maze

Analysts say harsh investor reactions to Cisco Q3 earnings don’t carry water.

Cisco shares declined about 15% on Wednesday, marking the largest single-day decline in 12 years, according to MarketWatch. The reactions followed Cisco’s fiscal year Q3 earnings report, in which the networking giant posted flat revenue year-over-year growth. The firm’s collaboration business dropped in year-over-year revenue. Cisco also posted a guidance of 1 to 5.5% decline in its next quarter.

Executives cited Cisco’s pullout from Russia and Belarus, Chinese COVID-19 lockdowns and supply chain issues as reasons for the numbers. It also noted that this year’s Q3 contained one less week than last year’s Q3. CEO Chuck Robbins said the company will overcome the “short-term” challenges.Robbins-Chuck_Cisco-2021.jpg

“While the topline is disappointing, we have navigated this complex year and actually will deliver solid EPS when we’re done,” Robbins said.


Futuriom’s Scott Raynovich

But investors aren’t buying the message, Eric Savitz of Barron’s wrote. And some analysts agreed.

“Cisco executives painted a picture of external factors beyond their control,” Futuriom principal analyst Scott Raynovich wrote. “But in fact, if you look at the trend over the past two years –  a period in which Cisco’s shares have gone down – there are greater forces at work. Cisco is still in existential crisis, as I have pointed out for years, as its hardware business model still dominates its sales culture, preventing any real growth in the areas it promotes, such as software and cybersecurity.”

The Big Picture

Three analysts, speaking to Channel Futures, disagreed with the dismal picture. Zeus Kerravala, founder and principal analyst of ZK Research, said Cisco is justified in blaming external forces.


ZK Research’s Zeus Kerravala

“They were bitten by macro issues,” Kerravala told Channel Futures. “There’s certain things as a company you can control, and there’s ones you can’t. And I think Cisco’s done a good job as they could in controlling the things they can.”

He said every company he has been speaking to has been suffering from supply chain shortages.

“Components just aren’t available right now,” he said.

Kerravala pointed to Cisco’s record-setting backlog of $15-plus billion. Add to that total product orders growing 8% year-over-year. That compares very well to the combined efforts of rivals like Arista Networks, Juniper Networks, Extreme Networks and even HPE

“I think their annual revenue wouldn’t beat Cisco’s backlog alone. That just shows there’s demand for the product; they just can’t fulfill on the demand because of supply chain issues,” Kerravala said.

However, Kerravala said the latest earnings should serve as a warning to Cisco reseller partners: order early.

“Order as early as you can, because I think these delays are going to carry on into 2024, maybe even 2025. It’s going to take us a long time to catch up on this,” he said.

Supply Chain Issues

Ian Redpath leads Omdia‘s components, transport and routing practice. He said Cisco will likely make up revenue ground in a future quarter when it ships the backlogged products. He agreed with Robin’s comment during the earnings call that “revenue performance in the upcoming quarters is less dependent on demand and more dependent on the supply availability in this increasingly complex environment.”


Omdia’s Ian Redpath

“$200 million down from ceasing business in Ukraine and Russia – it is a low-hanging fruit justification. Everyone understands it. But on the other hand, it is really a minimal impact to Cisco overall, so far,” Redpath told Channel Futures.

He also noted that the first quarter of the calendar year is “seasonally, notoriously soft.”

“So, given the three items cited, they didn’t do too bad,” Redpath said. “Like all major vendors, the big long term drivers – digital economy growth, shift to cloud and 5G – are all great drivers. The short-term challenge is the downside risk due an expanding list of geopolitical uncertainties. Cisco didn’t really go into one big upside possibility: government stimulus funding raining down from heaven.”

China Factor

Alex Smith, vice president of channels for Canalys, stressed the impact of China’s pandemic-related lockdowns. Bloomberg reported earlier this week that approximately 790,000 people in Shanghei could not leave their apartments.


Canalys’ Alex Smith

“The latest lockdowns in China are some of the most disruptive we’ve seen anywhere during the pandemic so certainly a major factor. Networking is one of worst hit sector from supply chain according to our latest partner polls so other competitors will struggle too. Issue is compounded for Cisco when software is reliant on hardware delivery,” Smith said.

Anurag Agrawal, founder and chief global analyst at Techaisle, agreed.


Techaisle’s Anurag Agrawal

“Cisco software and services depend upon hardware which was walloped by the recent China lockdown. It also does not help that Cisco’s financial quarter is one month out of sync with the calendar quarter. Regardless, Cisco is beginning to do well in the commercial segment and there is a huge potential growth opportunity in front of them.

Lastly, Smith said the investor community appears to be dealing with the reality of diminished 2022 growth in big tech.

Services Decline

Cisco reported an interesting contrast in its revenue breakdown. Product revenues went up 3% while service revenue down 8%. Cisco’s declining services revenue meshes interestingly with the message from its channel leaders that partners should adopt more managed services.

Kerravala noted that vendors like Cisco and Juniper are pushing for more automation in their products. If networks are running themselves, customers will need fewer services from the vendor in “tuning the knobs and turning the dials,” Kerravala said.

“So if that type of kind of implementation, break-fix, maintenance services are going away, then where’s does that services revenue come from? Certainly software subscriptions is a piece of that, but I do think managed services is a good opportunity,” he said.

Kerravala said a growing market exists around managed services. He said traditionally only 25-30% of the market has bought managed services, with the rest preferring to do it on their own. However, he recently interviewed SD-WAN purchasers if they wanted to consume the technology in a managed or co-managed fashion. Approximately two-thirds of respondents said they wanted some level of management.

“There’s a big shift coming in customers wanting help to deploy these things, because they are more complicated,” he said.


Cisco’s collaboration business, which it also its hybrid work segment, continues to stand out among Cisco’s portfolio, and not for great reasons. While Cisco’s networking, internet, security and application businesses grew, collaboration dipped by 6% year-over-year.

Kerravala said Webex faces stiff competition from Microsoft Teams and Zoom. Specifically, he said Microsoft essentially giving away the basline product for free to its users is a challenge.

He also said the shift to remote work did not do Webex any favors.

“When the pandemic started, Cisco got caught with its pants down a little bit. Webex had a lot of problems. It wasn’t very user friendly,” Kerravala.

However, Kerravala said Cisco has made significant strides with Webex in the last two years. He said he views the “well-built” product as on par with what Zoom offers. He also said Cisco may benefit from a hybrid work environment “where the devices and the endpoints matter more.”

“So many customers have this legacy notion of Webex. I think Cisco’s big problem here is getting customers to just try it again,” he said.

Agrawal tied supply chain issues back to the collaboration numbers.

“Cisco is over-rotated on its hybrid work narrative, which has been showing up in its collaboration story – again hit hard by the non-shipment of devices tied to software and services,” he told Channel Futures.

Want to contact the author directly about this story? Have ideas for a follow-up article? Email James Anderson or connect with him on LinkedIn.

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About the Author(s)

James Anderson

Senior News Editor, Channel Futures

James Anderson is a news editor for Channel Futures. He interned with Informa while working toward his degree in journalism from Arizona State University, then joined the company after graduating. He writes about SD-WAN, telecom and cablecos, technology services distributors and carriers. He has served as a moderator for multiple panels at Channel Partners events.

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