Systems shares are trading sharply higher in late trading Wednesday after the networking equipment provider posted solid results for its fiscal second quarter ended Jan. 28, while sharply increasing its outlook for the full year.
Cisco now expects fiscal 2023 to be its best growth year in at least a decade. The strong earnings report and surprising outlook should provide a boost to investor sentiment on the outlook for enterprise technology spending.
Cisco shares in late trading are 6% higher at $51.40.
For the quarter, Cisco (ticker: CSCO) reported revenue of $13.6 billion, up 7% from a year ago, in line with Wall Street estimates, but with growth a little ahead of the company’s guidance range of 4.5% to 6.5%. Adjusted profits of 88 cents a share were ahead of both the company’s guidance range of 84 to 86 cents and Wall Street’s consensus estimate of 85 cents. Non-GAAP gross margin was 63.9%, towards the top end of the company’s target range of 63% to 64%
Annualized recurring revenue at quarter end was $23.3 billion, up 6%. Total remaining performance obligations, a measure of work contracted for but not yet performed, is $31.8 billion, up 4% from a year earlier.
Orders were down 22% from a year ago, not a big surprise after a period of 30%-plus growth for several consecutive quarters a year ago.
For the fiscal third quarter, Cisco is projecting revenue growth of 11% to 13%, which at the middle of the range implies $14.4 billion, well above the Wall Street consensus forecast of $13.6 billion. Cisco sees profits for the quarter on an adjusted basis of between 96 cents and 98 cents a share, above the Street at 89 cents. Cisco sees non-GAAP gross margin for the quarter of between 63.5% and 64.5%, with non-GAAP operating margin ranging between 33% and 34%. The company expects GAAP profits of between 74 and 79 cents a share.
Cisco noted that product revenue was up 9% in the quarter, while service revenue improved 2%. Revenue was up 9% in the Americas, 5% in Europe, Middle East and Africa, and 1% in Asia-Pacific.
The company saw particularly strong growth in its core networking business, with revenue up 14% from a year ago.
For the fiscal year ending in July, Cisco now sees revenue increasing between 9% and 10.5%, which implies $56.6 billion, well above Wall Street at $54.5 billion. Previous guidance had called for growth in the 4% to 6% range.
The company lifted its forecast for full year non-GAAP profits to between $3.73 and $3.78 a share, from a previous forecast of $3.51 to $3.58 a share. The company sees full-year GAAP profits of $2.85 to $2.96 a share.
Cisco also increased its regular quarterly dividend rate by a penny a share to 39 cents. The company bought back $1.3 billion of common stock in the quarter.
“We continue to execute well, delivering better-than-expected results in revenue, record non-GAAP EPS and operating cash flow”, Cisco CFO Scott Herren said in a statement. “We are raising our full year outlook driven by our growing recurring revenue base and RPO, along with our healthy backlog and the steps we have taken to improve supply.”
In an interview with Barron’s, Herren noted that Cisco has made progress on the supply-chain issues that hampered the company’s ability to fulfill customer demand in recent quarters. He said that for many products lead times are down to historically normal levels.
Herren added that the company is doing more than just whittling down backlog. “We’re also seeing strength in the core business,” he says. Herren notes that the company saw double-digit sequential order growth in the quarter for both commercial and enterprise customers, with better-than-expected orders from the public sector. He said the one weaker spot in terms of orders was in the service provider market, with telcos “in a digestion period” after substantial expansion, and cloud players reducing orders at least in part because lead times have come down to a more normal range.
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