Citing strong broad-based demand, Cisco Systems Inc. today reported fiscal second-quarter revenue and profit growth that beat analysts’ forecasts and the high end of its own guidance.

Revenue rose 6% from a year ago, to $12.72 billion, ahead of analysts’ expectations of $12.66 billion. Earnings of $2.97 billion, or 84 cents per share on an adjusted basis, beat expectations of 81 cents.

Product revenue grew 9%, while service revenue down 1%. Annual recurring revenue, a key metric for Cisco as it navigates the path toward a more predictable software-based revenue stream, grew 11%, to $21.9 billion, while product ARR grew 20%. Perpetual license revenue fell 12%, while subscription revenues grew 17%.

In initial after-hours trading, Cisco stock rose more than 2%.

Broad-based demand

Demand was strong across the board, executives said, but supply chain issues held the company back from even stronger growth. “This resulted in the continued buildup in our backlog levels well beyond historical levels,” said Chief Financial Officer Scott Herren. Cisco ended the quarter with a product backlog of more than $14 billion up to 150% year-over-year, he said. Operating cash flow fell 17% primarily due to advance payments made to secure future supplies.

“In a normal world I expect to see software revenue growing faster but what with our backlog so big that may not happen for several quarters,” said Chief Executive Chuck Robbins (pictured).

Cisco narrowed its guidance for the third quarter and the full year. It expects revenue growth of between 3% and 5% with gross margins of 63.5% to 64.5%. For the year, revenues are expected to grow between 5.5% and 6.5% with earnings-per-share up about 7%.

‘Trends are in our favor’

“We’re seeing real demand that is pent-up from the pandemic and our pipelines are strong,” Robbins said. “We’re at the front end of trends that are really in our favor: 5G, Wi-Fi 6, mobile and edge computing.”

However, the supply chain woes that have slammed the industry weighed down the top line and elevated costs. Total cost of sales grew about 12%, faster than the revenue line. Nevertheless, gross margins also edged slightly from the previous quarter to 63.3% from 62.4%.

On a product line basis, the “secure, agile networks” category that encompasses campus switching, data center switching, enterprise routing and compute & wireless, grew 10%, to $5.97 billion. The fastest-growing segment by far was “internet for the future,” which covers routed optical networking, public 5G and silicon and optics. It jumped 46% off a much smaller base. The “hybrid work” segment that includes collaboration contact center fell 7%.

Data center business healthy

Demand for the company’s data center portfolio was “extremely strong,” Robbins said, “indicating the customers are still investing in private data centers.” He said the company took orders for more than 730,000 400-gigabit ports in the quarter.

The security segment, which has been one of Cisco’s fastest-growing businesses, rose just 4%. Robbins blamed the slowdown on supply chain issues, in part, and predicted the business will accelerate. “Our teams are working on our next-generation strategy right now and I feel confident over the next 12 to 18 months you should continue to see improvement in that business, but we also need to get supply chain issues dealt with on the firewall front first,” he said.

On a geographic basis, Cisco showed particularly strong growth in Asia/Pacific, up 13% year-over-year. The Europe/Middle East/Africa region grew 11%, while the Americas rose 3%.

Robbins said the company’s product portfolio puts it in an excellent position to take advantage of trends in the customer base. “Cisco is at the center of a massive shift toward hybrid cloud, hybrid work and digital transformation,” he said.

Photo: Robert Hof/SiliconANGLE