Cisco (CSCO) Bounces Back With Solid Quarter After Top Line Miss In AprQ, Supply Constraints Easing

2:13 pm Thursday, August 18th, 2022

Cisco Systems (CSCO) bounced back nicely with upside results in Q4 (Jul) after a pretty big top line miss in Q3 (Apr). We also got out first look at FY23 guidance, which was in-line for EPS, but offered nice revenue upside. The Q1 (Oct) revenue guidance was also a good bit better than expected. Cisco is known for being pretty conservative on guidance, so all of this revenue guidance was encouraging to see.

Just like last quarter, the problem is not demand. The shift to hybrid cloud, 5G, 400GB, IoT, hybrid work and an explosion of applications are driving demand for next-generation networking equipment and security.

It’s more about supply chain disruptions and component shortages. As such, Cisco’s revenue has little to do with demand as it has a record backlog. Revenue is much more a function of Cisco’s ability to ship product and it shipped more than expected in Q4 and the guidance implies it expects shipment levels to continue to increase in FY23.

Another item that stood out to us was Cisco saying that it has not seen a material change in demand related to enterprise spending despite higher interest rates and economic fears. We had concerns that enterprise spending may start to wane, but this was encouraging to hear.

A final kicker, which we do not think should be overlooked, is Cisco noting that as it goes through FY23 and it can finally work through its large backlog, it will begin to ship out more and more orders that actually reflect the price increases that were put into place in FY22. This should act as a nice tailwind to margins throughout the year.

Overall, there was a lot to like from this report. Most notably was that supply constraints are beginning to ease and enterprise spending remains resilient. Demand remains robust and customers want to spend. It is still early, but we sort of see JulQ as an inflection point where we have gone from Cisco being quite negative on the component issue in Q3 and Q4 to now being noticeably more confident on its call. Supply issues remain, but at least it is starting to turn a corner. Since Cisco is such a dominant player, this report also bodes well for other networking equipment names (JNPR, EXTR, CIEN, LITE, ANET, NOK) and Cisco suppliers, most notably Broadcom (AVGO +4%), which is also trading higher today.