May 18, 2023
Cisco, a bellwether vendor for the broader networking industry, reported relatively solid quarterly earnings this week. More importantly, company officials argued that long-term demand for Cisco's products remains mostly undimmed.
"The biggest factor driving the growth for this year is the huge amount of demand we've had from our customers that's been sitting in backlog as we've worked our way through some of the supply issues," said Cisco CFO Scott Herren this week on the company's quarterly earnings conference call, according to a Seeking Alpha transcript. "If you ask what's driving the growth, it's that, it's end-user demand."
Some financial analysts generally cheered the company's upbeat outlook, despite a 23% year-over-year dip in its orders.
"We are not surprised by Cisco's orders ... because of [inventory] digestion, lead time changes and some macro pressure," wrote the financial analysts at Rosenblatt Securities in a recent note to investors. "We think -23% ... is likely the bottom for order growth this cycle. The digestion and timing issues should ease ... and, in our view, the macro is not that bad."
The analysts generally argued that Cisco's customers, including big telecom network operators, are currently installing the equipment they stocked up on during the pandemic, when supply chain troubles made it difficult to obtain electronics and other networking components. However, as those customers work through their inventory pile-up, they ought to return to more normal equipment-ordering patterns later this year.
Figure 1: (Source: Cisco)
Other analysts took a similar stance.
"Management contends that demand patterns remain stable," wrote the financial analysts at Raymond James in their own note to investors. "We agree with them and encourage investors to focus on bookings."
The analysts noted that customer bookings of Cisco equipment – a figure they said helps indicate overall demand – grew 6% quarter-over-quarter and 21% year-over-year.
Cisco's CEO, Chuck Robbins, pointed to one final metric that he said supports the company's upbeat outlook: order cancellations. He said customer order cancellations are "well below historical levels, indicating the strength of our backlog and portfolio."
Overall, Cisco reported $14.6 billion in revenue, up 14% year-over-year. The company's stock remained relatively unchanged after its quarterly report.
Cisco isn't the only big telecom vendor to report a dip in orders due to customers' inventory backlogs. For example, Corning reported a 6% quarter-over-quarter decline in its fiber business. And both Ericsson and Nokia blamed "inventory adjustments" in North America for sluggish sales of 5G equipment.
Already the analysts at Dell'Oro Group warned that worldwide telecom capex – the sum of wireless and wireline telecom carrier investments – increased at a low single-digit rate year-over-year in 2022. They said that was down from high single-digit growth in 2021. And the firm warned of "sharp capex cuts in North America" over the next three years.
Broadly, questions continue to swirl around the telecom industry in general as operators in the US and globally look to cut costs amid unclear macroeconomic trends. Infinera CEO David Heard said recently that fears over "the 'R' word" – recession – could potentially dampen long-term demand for networking products among operators.
But Cisco officials remained nonplussed: "Based on our strong Q3 performance, we are once again raising our fiscal 2023 outlook for revenue and earnings per share," said Robbins, the company's CEO. "As we look ahead to fiscal year 2024, we expect to see modest revenue growth."
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