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MarketWatch First Take: Cisco investors spooked by supply-chain concerns, despite a return to growth

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Cisco Systems Inc. reported its best sales growth in nearly two years Wednesday, but the stock still tanked more than 5% in after-hours trading for other reasons, mostly focused on the bottom line.

Cisco
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guided for earnings below estimates in the current quarter, and noted the twin effects of shortages in components: Paying more to suppliers and straining to fill orders. Supply-chain issues are a cloud over most companies right now, in tech and beyond. For Cisco, they arrive at an inopportune time for a company finally seeing a resurgence in growth — Cisco had reported year-over-year declines in revenue for five consecutive quarters before reporting growth of nearly 7% Wednesday.

Scott Herren, in his first conversation with MarketWatch since leaving Autodesk
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to become chief financial officer of Cisco, wanted to focus on the positives, especially Cisco’s continued growth in recurring-revenue subscriptions and software.

“I just want to reiterate, we had a great quarter. We see momentum building,” Herren said Wednesday afternoon. “There is an enormous amount of good news here.”

Herren stressed record results and double-digit percentage growth for its Webex videoconferencing service (while using the service for the interview) and the security division, as Cisco continues to increase the percentage of software and product it sells by subscription.

Cisco’s largest business, though, is networking, and on-campus networking led the charge to revenue growth as companies prepare for employees to gradually return after more than a year of working remotely. Product revenue was up 6%, led by strength across many products, including campus switching, where many companies are upgrading to WiFi 6.

In Wednesday’s earnings conference call, Chief Executive Chuck Robbins confidently stated, “We are experiencing the strongest demand in nearly a decade.” Herren echoed that later Wednesday, pointing to a time after the effects of the housing crisis lifted.

“It’s something we have not seen since 2012, there is a huge amount of momentum in the business. It’s also quite clear that some of this is pent-up demand, particularly on the campus side of things,” Herren said.

Robbins said that Cisco has made deals with “several of our key suppliers,” and executives admitted they have raised prices to cover their costs, at least on the compute side of the business. Herren said Cisco is in constant discussions about how to react in the current environment, but would approach further price hikes “surgically.”

The company’s earnings guidance was also slightly disappointing, but a revenue beat could have been wider. “If we didn’t have the supply-chain challenges, we would have been guiding higher on revenue,” Robbins said.

Investors hope that Cisco can keep up the current pace of growth, after a long stretch of declining revenue. But the sustainability of a demand rebound for on-premises gear is still a question mark. Cisco investors will have to bet that the high-margin, repeating software revenue covers up any softness.

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