Cisco Posts Solid Q2 Results

The Six Five team discusses Cisco’s Q2 earnings results.

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Transcript:

Daniel Newman: Let’s talk about Cisco. So Cisco and NVIDIA both report after the hour at the end of the day, both are bellwethers in different respects and different markets Pat, but you had some good coverage on Cisco. So I’ll let you give the first stab at that one.

Patrick Moorhead: Yeah. So first off, the top and on the bottom and a really nice guide, they saw a couple point bump, which was really, really good for Cisco. And I think, first off, super strong results even though they’re having a hard time with some supply constraints. So they had $14 billion in product backlog, which is absolutely astounding. So they did these figures even during supply constraints, really great demand its third consecutive quarter of more than 30% product growth, which I think is additive to what I talked about before. And that’s really catalyst 9,000 switches, wifi, 60 access points, private 5G is really driving a lot of that demand. So, one thing that was kind of a head scratcher at first, which then I’m thinking, “Okay, not really much.” Was that hybrid work was down 9%.

And my first thought was, “Wait a second. We’re still kind of in this pandemic, right?” Well, not necessarily in how licenses are done. Somebody might do an annual license and it’s not paying on a quarterly basis, they might recognize that revenue up front. We also saw what happened with Zoom, and their numbers have gone down as well. So once I thought through it, it wasn’t too big of a deal. Every one of their customer markets was up double digits on a product basis, enterprise, public sector, commercial service provider. It’s almost like in this case, the pandemic is over, which obviously it’s not, but the only reason that you would be pumping up, particularly things like a catalyst switch was at the core of the network, is if you have a bunch of people coming back to work, so all in all, a really, really great quarter.

Daniel Newman: Yeah, it was strong for Cisco. The company’s mid high single digit growth is what people are looking for, Pat. You mentioned the backlog. I think that was a really, really positive thing. Of course, backlog can indicate two things. One is just huge demand coming your way. It also can be indicative of some of the ongoing supply chain challenges, because trust me, they don’t want it on the backlog. They want it in a box and shipped out to people. I do think that Cisco’s making the move, the pivot to software, something I’ve been really focused on for the company. It’s something that definitely needs to happen. The downside of collaboration is something to kind of keep an eye on. WebEx didn’t grow quite as fast as some of the other collaboration businesses throughout the pandemic, but it was also very established when the pandemic did start.

Whereas some of the others were a bit newer in terms of adoption, but that’s an area for the company to keep an eye on for growth. I think the kind of quote, unquote, Cisco, the software company. I mean 3.8 billion in software revenue this quarter, 6% growth, obviously that’s not a fast growth software number, but you are talking about a fairly large overall for the quarter. You’re talking about a run rate of nearly $15 billion in software on an annual basis. The software backlog is also 2 billion, so it’s not inconsequential on the software side, but it tends to get tied up with hardware that they’re not able to ship. And then of course, you’ve got the ARR numbers, Pat, their ARR is now up to 21.9 billion, 11% growth, so that’s pretty solid too. The one other thing that happened this week and this isn’t necessarily about earnings in general, but you might have heard, or if you haven’t, have seen some of the headlines, there is some talk of Cisco potentially trying to acquire Splunk.

Splunk’s a company I track very closely and watch. I actually think that would be a tremendous acquisition for Cisco, this all-encompassing data and observability. You’ve seen the move with app dynamics that have been made, but Splunk’s fast growth top line hasn’t been profitable at this point. It’s still a growth company, but they would bring an element of the ITSM, SecOps, ITOps, observability, most of their revenues move to the cloud or moving to the cloud, mostly subscription revenue in an area that as data continues to proliferate and grow, companies are going to continue to invest in Splunk has a lot of big customers that they would bring along with them. That could be really good price tag, 20 billion, probably not enough to get the deal done. I think about 24 billion, you’re going to get everybody to the table.

This could actually happen if Cisco keeps pushing, but that was really interesting. I know it wasn’t in the earnings per se, because there hasn’t formally been a deal or an offer made, but I could see that happening.