Networking giant Cisco Systems Inc. showed strong execution in most areas in its fiscal third quarter as it posted record revenue of $14.6 billion, up 14% year-over-year and topping estimates, but there’s a lot more behind the headline numbers.

Cisco is now creeping up on the $60 billion annual revenue mark, which is a number that seemed out of reach just a few years ago when revenue seemed stuck just under $50 billion. Looking ahead, Cisco expects to earn between $1.05 and $1.07 per share in the fourth quarter, with revenue expected to grow in the 14% to 16% range, the midpoint slightly ahead of the expectation of $1.03 per share and 14.1% growth. The company also raised its full-year number, expecting earning to grow to $3.80 to $3.82 a share and revenue to grow 10% to 10.5%.

The numbers are the numbers, but as I always do, I like to look between them to understand current and future trends. Here are some of the notable points from the quarter and what that means for Cisco’s future:

Backlog returning to ‘normal’ over time

In the earnings release, Cisco noted that remaining performance obligations are at $32.1 billion, up 6%, with 53% to be recognized as revenue over the next 12 months. This indicates that the supply chain issues are easing, which is something Chief Executive Chuck Robbins (pictured) has repeatedly mentioned on previous calls.

One concern I had was that I wasn’t sure if the backlog would fully translate to revenue, as many customers had told me they ordered products from multiple vendors and would cancel once one vendor could meet their demand. Cisco did tell me that order cancellation rates are now below historic levels, and channel partners have confirmed this. The one question that remains is what is a “normal” backlog for a company like Cisco. It won’t be $30 billion, but it likely won’t ever return to pre-COVID levels.

Declining orders does not mean declining demand

Although Cisco put up good numbers, the stock traded down slightly after hours, with the focus seemingly on the metric that orders were down 23%, and this is a good example of looking between the numbers to fully understand what’s going on. In an interview with Barron’s, Chief Financial Officer Scott Herren confirmed several things I had heard in the field.

The most notable point is that the relief in the supply chain has shortened product availability times, meaning customers do not need to order 18 months or two years out any longer. Also, the reduction in backlog means Cisco is shipping previously ordered products, and now customers need to take the product in and deploy it before they order more.

Cisco continues to transition to a software company

As has been the trend, all software metrics were up this quarter. Total software revenue is now $4.3 billion, which annualizes to about $17 billion. This was up 18% year-over-year. Annualized revenue run rate is now $23.8 billion, up 6% from a year ago, with product ARR up 10%. Total subscription revenue rose 17%.

All of these numbers are important in the continued transformation of Cisco. Although many software numbers are tied to hardware, it creates revenue predictability and more consistent product upgrades. Cisco also has the opportunity to leverage some best-of-breed assets as Trojan horses that can eventually pull other products through. One reseller I talked to this week told me, “ThousandEyes is an excellent product, and I’d like to see it deployed everywhere.”

Networking is booming

Of all the product areas, networking, or “Secure, Agile Networks” in Cisco-speak, rose a whopping 29%. This is, by far, Cisco’s largest product area and currently comprises 52% of total revenue.

This growth is driven by the fact that the network is the foundation for digital transformation. Companies are modernizing compute by moving to the cloud, changing the way people work, which relies on mobility, and connecting everything as part of “smart” initiatives. This mandates network evolution, and Cisco still has the broadest portfolio with the largest share.

Looking ahead, I expect to see an acceleration of the network business as the company cleans up its portfolio. In some ways, Cisco has remained successful despite itself. If one looks at the portfolio, Meraki, Catalyst, Nexus, DNA Center, Viptela, and the like, it looks like a hodgepodge of products. At Cisco Live 2022, the company announced the long-awaited Meraki-Catalyst integration, and I expect to see more in this area come Cisco Live 2023 in June.

Security is still flailing

The product area known as “End to End Security” posted revenue of $958 million, representing 2% growth. While growth is good, that pales compared with the growth numbers of companies such as Fortinet Inc. (30%) and Palo Alto Networks Inc. (23%). As I pointed out in my security platform post, Cisco has good products, but it’s a collection of best-of-breed components without a larger end game.

This seems to be changing. At the RSA Conference, the company announced its extended detection and response or XDR offering, and I’m hearing rumors that Cisco has another major security announcement set for Cisco Live 2023. If it can grow just a few percentage points in the massive security industry, that will move the revenue needle like no other product category. More coming here, I’m sure.

Collaboration falls in double digits

The collaboration revenue bucket fell 13%, posting revenue of $985 million. I’m sure this disappoints the collaboration business unit that has loaded Webex with innovation. I use both Microsoft Teams and Cisco Webex regularly and Webex and can definitively say Webex has a significant technology, performance and technology advantage over its Redmond-based competitor. Unfortunately, customers haven’t been looking for the best product but have adopted Teams because of the Microsoft License bundles.

Over the past year, Cisco has changed its competitive approach with Microsoft and adopted the attitude, “If you can’t beat them, join them.” At the Enterprise Connect event, Cisco demonstrated that its device portfolio now natively integrates with Microsoft Teams.

Also, Microsoft’s voice plans are expensive and not enterprise-grade, and many of the unified-communications-as-a-service providers, Cisco included, can sell voice services into Teams, which can help “backdoor” Cisco into accounts. Once it gets a foothold into an account, it can bring the benefits of Webex to other departments. For example, Webex offers better Webinar and hybrid event capabilities, which might appeal to a sales team.

The reality is that, although many companies use Teams, it’s often not the only collaboration tool. One of Cisco’s bigger Webex reseller partners told me, “The strategy of winning voice and selling the suite after is starting to work. We are hopeful that this continues to generate new opportunities for us.”

Overall, it was a solid quarter for a company still transitioning into the next wave of itself. The secular trends of artificial intelligence, hybrid work, cloud, the internet of things, and more work in Cisco’s favor, but there is still plenty of work to be done with its product. As Cisco Live 2023 approaches in less than a month, we should get a good glimpse of what the next year has in store for Cisco customers.

Zeus Kerravala is a principal analyst at ZK Research, a division of Kerravala Consulting. He wrote this article for SiliconANGLE.

Photo: Cisco/livestream