The Six Five team discusses Cisco’s Q4 2023 earnings.
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Daniel Newman: Let’s talk about Cisco. Strong quarter, big growth. Let’s start with Q4, because it was a Q4 year situation. The Q4, 15.2 billion revenue, 16% year on year growth. They had a beat really on all fronts. The earnings beat was bigger than the revenue beat, but they beat on everything. Demand is up, 30% sequential order growth, and they had some really positive market share gains across some of their major infrastructure networking markets. They saw cashflow up, they saw ARR up, software revenue up.
And that’s where I want to focus a little bit on Cisco is, you and I had the chance to sit with a small group with Chuck Robbins back at MWC this year. And one of the things that Chuck really leaned into was the company wants to make this big pivot to more software, more recurring revenue, more subscription revenue. And when you are constructed, built, deployed to the channels the way Cisco is, it’s not an easy transformation to make. This is a company that for the longest time really made its money selling a box with a service contract, and it did it through very robust yet what I would say value added channels with those like Ingram and Tech Data, and that was how it did its business. And as we’ve seen this massive switch to cloud, to software, to subscriptions, Cisco has been a company that’s been having to navigate that change without wanting to blow up the golden goose, because it was a very strong and consistent business model.
But under Chuck Robbins, their CEO, the company saw ARR grow again, 5%. Not a huge amount of growth, but again, we’re not looking at this 5, first of all, you’re looking at 24 billion annual in recurring revenue, so it’s a lot of recurring revenue. And you’re also seeing ARR on products go up, you’re seeing software growth in mid to high double-digits, you’re seeing subscription revenue up in low double-digits amount. And you’re seeing their backlog continue to grow, and backlog growth means the future state is going to be good for the company.
So that was on the quarter. Now the company also on the full year saw growth, it was low double-digits Pat, so this big Q4 ended up helping the company go from a single digit to a double-digit growth. And the market was pretty rewarding. Now you got to remember, this week has been a pretty terrible week for stock. Tech as a whole has been selling off pretty hard, you’re seeing crypto fall, you’re seeing interest rates looking to be sticky high. We had hawkish remarks come out from the Fed this week. We are seeing regional banks under stress, we’re seeing long-term yields going up. And the thing is, we’re not economists, Pat, I think we should say that. There are some factors here that when those kinds of macro environment things are taking place, the tech tends to have more, we’ll call it vulnerability, to seeing slowing growth.
So when this number came out Pat, I basically said, Cisco is such a good bellwether because it sits in this kind of, it’s core technology, it’s growth technology, and it’s an opportunity for companies to show, are enterprises investing in tech? This isn’t just hyperscale cloud companies, a lot of their customers are enterprises. So are they spending, are they buying into tech? I think what the results showed is there’s definitely a higher amount of confidence.
I’ll add one more thing and this might be something you’ll want to talk more about and I’ll leave it up for you Pat. There was some very strong indications in the comments that the business’s growth and market share and take has been related to AI. And so while Cisco hasn’t necessarily come out with a really powerhouse AI story yet, picks, axes and shovels are being developed, built, deployed, and sold by Cisco Systems and Cisco is a beneficiary. You got to move all that data, got to move it through the cloud, you got to move it through the on-prem, you got to move it to the edge. And so Cisco seems to be a go-to right now for those that are investing in AI and that showed up in their numbers as well.
Patrick Moorhead: Yeah, a lot of good stuff to see here. I mean, the first call out to me is just a staggering increase in revenue for networking. I mean 33%, Dan, and I line that up against all the IaaS providers, I mean it’s gigantic growth there, and 100% to do a double click.
Chuck also talked about gaining market share in literally all markets. My initial go-to is, hey, we’re going to go to the core and that’s where they’re gaining market share. But then again, maybe it’s like, they are the dominant player at the core in western worlds, and Huawei really does their business outside of that. But they gained three points of share year over year in campus switching, wireless LAN, and SP, service provider routing. Think of the AT&T’s, the Comcasts and the folks like that. So taking a share is pretty big. I’ll be interested when we swing around for HPE and see how Aruba did on campus and wireless LAN as we get into that. But they took share from somebody, they usually don’t talk a lot about that, but that was really the driver here.
Now, I’m looking for something that’s not good. When you have something that’s so good, it’s like okay, there’s got to be something. So I looked at regions, all regions were up. Americas was up just absolute big time. But also to your point on ARR, what we are seeing is the biggest increase in ARR is on products, right? And we’re always talking about infrastructure as a service, and that absolutely shows that 100%. Now, obviously most services are recurring, so there’s not as much growth, but this is where we saw double-digit growth from them, which was recurring revenues as a product. Software, again up 20%, software subscription, and then up 17% as a percentage of total software revenue. So really big numbers.
Dan, I need to go dive into the AI piece, but what I did like, and I believe this is the first time that Chuck talked about AI training fabrics. A lot of the focus tends to be on let’s say the GPU or the ASIC doing the AI training or inference, but as we saw from both Broadcom and Marvell, this is a networking game as much as it is accelerator game, quite frankly because you can’t fit a large model into one server or one GPU or one rack. So it’s the amount of clusters that you can pull together to do that. And Chuck said he took orders for half a billion dollars. I love hard numbers, half a billion dollars in AI ethernet fabrics, and that there were piloting 800Gb, which obviously has more performance, the faster that you can get your training and inference run.
So overall, great job with that, Cisco. I’m still keeping my eye on that WebEx business, still down. And I look at folks like Zoom and see how they’re doing, I look at folks like RingCentral. I mean it is a tough comparison, but you would hope that that would start trending up, because quite frankly, Dan, the environment in the office is suboptimal. Let’s say you bring 30-year folks back to the office and they’re in a big conference room that has legacy equipment that won’t get one block, one face for the folks who are remote, and that is a lousy experience. I mean, you and I have both done a lot of meetings where somebody’s in a conference call, you can’t actually see their face. If you can’t see their face, you can’t see the inflections, it’s not going to be nearly as much of a productive environment.