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Cisco earnings: ‘We’re supply constrained right now,’ CFO says

Cisco CFO Scott Herren joins Yahoo Finance Live to discuss company earnings, consumer demand, supply chain constraints, retail investors, and the outlook for growth.

Video transcript

BRIAN SOZZI: In a more positive note here, watching shares of Cisco today after the company beat fourth-quarter earnings expectations, and posted its second strongest yearly revenue ever. The networking equipment company also provided upbeat guidance for the year to come.

Joining us now to discuss is Cisco CFO, Scott Herren. Scott, good to see you, and it's good to-- actually, I know you were watching this debate, we're going to talk about a positive story and some upbeat stuff here besides Kohl's and Bed Bath. But your quarter, what are some of your takeaways here? Why were you able to beat some of these estimates out there inside of this slowing economy?

SCOTT HERREN: Yeah. So Brian, it's great to be here. Thanks for having me. It was a strong quarter, kind of top to bottom across the board. You know, what we saw during the quarter is demand continued to stay strong throughout the quarter. And I think it's a little bit hard to see that in some of the numbers, we gave a lot of detail on the call last night about to contextualize the demand. Because if you recall, Q4 a year ago, we had 31% bookings growth, right, order growth.

That's a tough compare. biggest quarter in the history of the company. But the quarter we just closed that was compared to that was the second biggest quarter in the company history, and sequentially up more than 15%, which is right in line with normal sequentials. Linearity was good, we saw strength across double-digit growth sequentially across three of our four major customer markets.

BRIAN SOZZI: The product orders.

SCOTT HERREN: Momentum-- and product orders.

BRIAN SOZZI: That's getting attention this morning, down what, 6%?

SCOTT HERREN: Down 6%.

BRIAN SOZZI: What drove that?

SCOTT HERREN: Again, compare-- it's the compare point.

BRIAN SOZZI: Last year.

SCOTT HERREN: It's math, right? Second biggest quarter in our history but compared to the biggest quarter in the company's history. And that's why I think contextualizing it by talking about how it looks sequentially and how those sequential compares look was the breadcrumbs we tried to give on the call last night.

And I think it's a testament to-- because one of the questions that I got asked is with the world seeming like it's beginning to slow down a little bit, right, there's all the talk of recession, and I don't want to weigh into that debate, I'm not an economist. So I don't want to weigh into that debate but are you seeing any kind of a slowdown? And we really didn't. As we worked our way through the quarter demand continued to stay strong for us right through the quarter. And so we come into-- that was the end of our fiscal year, by the way, starting our new fiscal year, we come in with some nice momentum.

JULIE HYMAN: And one of the things you talked about that was holding you back was not demand but rather still some of the supply chain issues that are getting better it sounds like but still, is there any way of quantifying if those supply chain issues went away tomorrow how much in growth would that unlock for you? In other words, is there a way of quantifying exactly how much supply constraints are holding you back at this point?

SCOTT HERREN: We have done so much work on the supply chain to really build greater resiliency. And that was one of the issues that we had in our Q3 was the zero COVID policy and the shutdowns in Shanghai led us to very late in the quarter having some supply chain difficulties. To be clear, I still expect to be supply constrained in certain areas right through our fiscal '23, which just started the 1st of August.

So supply constraints are not going away. What it has done though is we've built up the biggest backlog in our company's history, right? And I didn't-- we didn't give the data point last night but it was greater than $15 billion in Q3, and it rose again. And what we did say is it grew triple-digits year on year.

So we've got a company that now is 44% recurring revenue with about $31.5 billion of RPO, remaining performance obligations, of which $17 billion will turn into revenue in the next 12 months, right? So the recurring revenue side continues to look strong. We've got an enormous backlog to work our way through. We would be giving a higher guide for fiscal '23 were it not for supply constraints. I think the way to think about it is we're not demand-constrained, we're supply-constrained right now.

BRIAN SOZZI: You-- I've known only Cisco to be an acquisition beast for going on over a decade, as long as I've been covering the company. Valuations have gotten slaughtered here throughout tech. I mean, are you just licking your chops here, are you ready to pull the trigger on anything?

SCOTT HERREN: M&A has always been part of our strategy, Brian, as you know. And I think we have developed a expertise both at the transaction side and at the integration side. And those are both equally important. So there's no change in overall demeanor.

I think the valuation change, it hasn't changed the way we think about it. What's interesting to us, what are the right targets, what it may change a bit is the willingness of the people that we're interested in acquiring to have a conversation with us.

BRIAN SOZZI: Are they having those conversations?

SCOTT HERREN: Especially if they're private, it doesn't pay to get into that conversation but especially, if they're private and they thought they were headed to an enormous IPO, and of course, the IPO windows are more difficult. So our strategy is unchanged. It gives us a chance, though to perhaps have more conversations.

JULIE HYMAN: Brian, is now compiling a list in his brain.

SCOTT HERREN: Yeah, exactly.

JULIE HYMAN: Of the potential IPOs that did-- that are not happening.

SCOTT HERREN: Let me just give you the list.

JULIE HYMAN: I want to come back to not seeing slowing demand because that is so counter to so many companies that we've been hearing from. And I know you're not an economist, you're not going to weigh in on a recession but like what-- explain the disconnect to me, is it just that business demand remains strong? Do you expect it to slow down at some point because maybe it's operating at a lag? But I'm-- just dig into that a little bit.

SCOTT HERREN: Yeah, it's such a good question. And it's one that I think, speaks to the importance of both networking and security in a post-pandemic world, right? Your network and the security around that network has never been more critical, it's the central nervous system of your company at this point.

So while some things if you expect a recession, I think we're all looking at it's a time to be prudent, right? And we're going to be prudent as well, there are certain things that are more discretionary than others. Building out a resilient network that is secure, that goes to-- with remote work being as broad spread as it is, is not discretionary, you have to invest in that.

JULIE HYMAN: So if clients are cutting spending, they're not cutting this kind of spending. Because we're seeing a lot of companies that are cutting expenses.

SCOTT HERREN: Yeah.

JULIE HYMAN: But this is not a discretionary expense, they're not going to cut it?

SCOTT HERREN: What we see is and what we hear from our customers is, this is so strategic to their business plans, that it's not an area that is discretionary.

BRIAN SOZZI: Right now, Scott, you don't know this, but on the Yahoo Finance platform Cisco has the most visited ticker page after your earnings. And this usually happens after you guys report, just really underscoring the interest in what you're doing and where you guys are going. As a CFO of such a large company, how do you think about retail investors? Do you have that conversation internally with the management team? And how do you think about catering to that rise of the retail investor?

SCOTT HERREN: Our retail investors are super important. And it's about 25% of our total investor base, right? Which is surprising--

BRIAN SOZZI: Wow, that is surprising.

SCOTT HERREN: --for a company at our scale. That's a lot of retail investors. We spend a lot of time in forums like this. Chuck will be on media this morning also as an opportunity to get in front of retail investors. We have a-- we pay a nice dividend, and I think that also is attractive to a lot of retail investors. They're very important and the messaging that comes out of an earnings call like we just had needs to get into their hands so that they understand that.

JULIE HYMAN: I know Sozz has been in favor of more companies opening up some of their calls to retail investors, for example.

BRIAN SOZZI: Yeah, would you-- is that something you're looking at? I mean, change how your earnings call is run?

SCOTT HERREN: It's not something that I've thought about, to be honest with you.

BRIAN SOZZI: We'll take it offline, it's something that I'm just very passionate about like reinventing the earnings call, and thinking how that retail investor could be better served.

SCOTT HERREN: Well, of course, they can call in to the call and listen but they're not in the Q&A queue is that what you're saying. Yeah, that's an interesting point.

BRIAN SOZZI: All right, well you're getting an email from me. We'll leave it there. Cisco CFO Scott Herren. Thanks for coming to the studio. It's good to see you in person. We appreciate it.

SCOTT HERREN: Thank you very much.

BRIAN SOZZI: Appreciate it.

SCOTT HERREN: Thanks for having us.