Chuck Robins, CEO of Cisco Systems (CSCO), is pushing back on concerns held by the Club and other investors about whether the networking and software company is clearing its orders in the pipeline at an fast pace compared to new business coming in.
"Our order growth remains stable," Robbins told CNBC on Thursday, one day after Cisco reported a better-than-expected fiscal 2023 second quarter and hiked its full-year sales and earnings guidance.
Despite an over 6% advance in the Dow stock in an otherwise down market, we're worried that Cisco's second-quarter new orders declined 22% year-over-year, while the value of its once-record backlog declined 6% sequentially. We maintain a more cautious view on the stock.
Robbins said, "This last quarter was the third-highest Q2 in the history of the company from an orders perspective. So it didn't feel like this thing is falling off a cliff by any stretch." To be sure, that's a tough comparison to the same period a year ago, when orders grew 34%.
Improvements across Cisco's supply chain are accelerating the company's efforts to fulfill orders in its hefty backlog. This faster-than-expected drawdown process is a key reason why Cisco late Wednesday boosted its guidance.
The company now expects fiscal 2023 sales to grow between 9% and 10.5%, up considerably from the prior estimate of 4.5% to 6.5%. Full-year earnings are projected between $3.73 and $3.78 per share, compared with the old projections of $3.51 to $3.58.
With the backlog being worked through quicker than expected, the debate among investors is, essentially, what happens to the trajectory of Cisco's revenue beyond the next couple of quarters? Could this be peak revenue growth? That's why there is a sharp focus on new order growth amid concerns a slowing global economy could prompt customers to cut back on technology spending.
"The whole notion that we're actually just draining backlog, our backlog was created by significant customer demand. It's not like it just showed up," Robbins said on CNBC. Cisco's backlog remains higher than where it stood at the same time last year and well above historical norms for both software and hardware, management said on Wednesday evening's conference call.
Additionally, Robbins stressed, the company's positive outlook also is informed by its $31.8 billion worth of remaining performance obligations (RPO), which represents future revenue under contract but not yet recorded in quarterly results. Roughly $17 billion of that RPO will be recognized over the next four quarters, Robbins said Thursday.
"When you combine the RPO and the fact we have revenue on our balance sheet just coming off every quarter, with orders remaining stable and with our backlog, we have a high degree of visibility and feel confident," said Robbins, now in his eighth year leading Cisco, which sells network routers, data center switches — and, increasingly, various enterprise software products.
Club take
Cisco's fiscal second-quarter results were strong and its full-year guidance stronger. Make no mistake, we're encouraged by both of those things. But because stocks are forward-looking assets, our focus must be what's ahead.
Right now, we don't have a great sense of what Cisco's growth will look like next year. If fiscal 2023 ends up being as robust as Cisco expects, that means the company could have a difficult comparison across its fiscal 2024.
Until we get a better sense of Cisco's growth trajectory for next year, we maintain our 2 rating on the stock, which like many beaten-down tech names in 2022 started off the new year up more than 8%. Shares lost nearly 25% in last year's terrible market.
Cisco currently trades at about 13.5x the midpoint of the new earnings per share (EPS) guidance range. The stock's low multiple in a market filled with expensive tech valuations is one reason why we have owned it for so long.
(Jim Cramer's Charitable Trust is long CSCO . See here for a full list of the stocks.)
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