Cisco CEO Sees Growth From Security, Software, Generative AI

‘As you’ve heard me say, we’ve revamped our strategy, put a world-class team in place, and made [security] a top priority for the company. Over the coming quarters, you will see new innovations in this space building on our strong Cisco security cloud strategy, including at Cisco Live next month. Based on the rapid progress we are making, we are optimistic about our opportunity in this fast growing market,’ says Cisco Chairman and CEO Chuck Robbins.

A series of fiscal quarters of year-over-year growth Wednesday led Cisco to raise guidance for fiscal 2023 and unveil expectations for further growth in fiscal 2024.

Cisco delivered what Chairman and CEO Chuck Robbins called another strong quarter characterized by Cisco’s strongest-ever revenue, non-GAAP income, non-GAAP earnings per share, and operating cash flow.

“We also continued to successfully execute on our strategy driving solid growth in ARR (annual recurring revenue) to nearly $24 billion and posting double-digit growth in subscription and software revenues,” Robbins said. “Based on our strong Q3 performance, we are once again raising our fiscal 2023 outlook for revenue and earnings per share.”

[Related: Cisco to Acquire Valtix To Further Security Cloud Strategy ]

Cisco also expects to see moderate revenue growth for fiscal year 2024 compared to full year 2023, where growth will be in the double digits over 2022, Robbins said.

Cisco’s long-term growth is a result of three factors, Robbins said.

The is continued success in Cisco’s movement towards more subscriptions and recurring revenue.

“In Q3, we delivered 18 percent growth in software revenues,” he said. “We also have $32 billion in remaining performance obligations, and we expect to see this momentum accelerate.”

The second, Robbins said, is the enormous opportunity Cisco sees from security.

“As you’ve heard me say, we’ve revamped our strategy, put a world-class team in place, and made this a top priority for the company,” he said. “Over the coming quarters, you will see new innovations in this space building on our strong Cisco security cloud strategy, including at Cisco Live next month. Based on the rapid progress we are making, we are optimistic about our opportunity in this fast growing market.”

The third factor is generative AI and cloud, Robbins said.

“At Cisco, we already use predictive AI extensively across our portfolio,” he said. “In addition, our core networking technology is already powering some of the leading AI models run by hyperscalers around the world. We have also moved rapidly to leverage generative AI capabilities in our own products, which you’ll hear more about in the next few weeks and beyond starting at Cisco Live.”

Cisco’s fiscal third quarter showed the company’s strength in its operating discipline, Robbins said.

“As we expected, the actions we took to mitigate supply constraints have continued to pay off,” he said. “Price realization as a result of the actions we put in place last year helped offset inflationary pressures. Our disciplined cost management enabled us to continue to expand gross margins as well as prioritize our strategic investments to drive long-term growth.”

Customer demand, in the meantime, is being shaped by a few factors that Robbins said is impacting the entire industry, including an increase in Cisco’s product shipments that is leading customers or partners to absorb the shipments prior to placing new orders, as well as a significant reduction in product lead times.

The third factor, Robbins said, are third macroeconomic conditions.

“[Our customers} continue to invest in key technologies that are core to their overall strategies,” he said. “As we previously shared, given the unprecedented demand for our technology during the pandemic, we believe sequential order rates are far more informative than year over year rates. Just like the prior two quarters, our sequentials in Q3 are in general alignment with historical ranges, coming in one point below the historical range.”

Cisco is also seeing order cancellation rates well below historical levels, Robbins said.

“In terms of our backlog, we continue to expect that we will end the fiscal year with roughly double our normal product backlog,” he said.

Cisco’s results makes the company optimistic about opportunities going forward, Robbins said.

“As of now, we see modest revenue growth in fiscal year ’24 on top of our strong performance in fiscal year ’23,” he said. “You can also expect us to grow earnings per share at a higher rate than revenue in Q4 fiscal year ‘23, and full fiscal year ‘24, reflecting improving gross margins and strong expense management.”

For its third fiscal quarter 2023, which ended April 29, Cisco reported revenue of 14.6 billion, up 14 percent from the $12.8 billion the company reported for its third fiscal quarter 2022.

That beat analyst expectations by $210 million, according to Seeking Alpha.

For the quarter, product revenue rose 17 percent over last year, while service revenue rose 3 percent. On the product revenue side, Cisco’s networking business rose 29 percent over last year, Internet revenue rose 5 percent, security revenue rose 2 percent, and application optimization revenue rose 12 percent, while collaboration revenue fell 13 percent.

Americas revenue rose 13 percent, EMEA (Europe, Middle, East, and Africa) revenue rose 16 percent, and APJC (Asia-Pacific and Japan) revenue rose 11 percent.

The company also reported GAAP net income of $3.2 billion or 78 cents per share, up from last year’s $3.0 billion or 73 cents per share. On a non-GAAP basis, net income for the quarter was $4.1 billion or $1.00 per share, up from $3.6 billion or 87 cents per share.

That beat analyst expectations by 3 cents per share on a non-GAAP basis, according to Seeking Alpha.

Looking ahead, Cisco expect fourth fiscal quarter 2023 revenue to rise 14 percent to 16 percent over that of the same period last year. Non-GAAP gross margin rate is expected to climb by 64.5 percent to 65.5 percent, non-GAAP operating margin is expected to climb 34 percent to 35 percent, and non-GAAP earnings per share is expected to be between $1.05 and $1.07.

For all of fiscal year 2023, Cisco expects a 10 percent to 10.5 percent growth in annual revenue over fiscal 2022, with non-GAAP earnings per share of $3.80 to $3.82 and GAAP earnings per share of $2.93 to $2.98.