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Cisco CFO: ‘We’re seeing really strong demand coming in’

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Cisco CFO, Scott Herren, joins Yahoo Finance to discuss Cisco’s Q3 earnings and how the company is planning to deal with strong demand while it moves forward for future growth.

Video Transcript

JULIE HYMAN: Cisco came out with its earnings after the close of trading yesterday, and like many of the companies we've been talking about, and like we talked about earlier, it's being affected by some of these macro dynamics that are becoming increasingly common-- that is a lot of demand for its products and services, but a little trickier on the supply side.

And that is going to crimp the company's earnings to some degree in the current quarter. Let's talk to Scott Herren more about that. He is the Chief Financial Officer at Cisco. Scott, thank you so much for being here.

And I know you talked about that the shortages could last until the end of the year. That's something we've heard from a lot of chip executives as well. And you said that your revenue projections would have been higher if you had been able to get more chips in the supply chain. Can you quantify that at all? What kind of hit were you taking to-- are you going to be taking revenue as a result of not being able to get more chips?

SCOTT HERREN: Yeah, first of all, Julie, thanks for having me this morning. And I'd like to step back and just spend a minute on the demand we're seeing. It's near record levels of demand for the product-- first time we've had double-digit growth in orders since 2012.

So we're seeing really strong demand coming in. And we're seeing our backlog build because of some of the supply chain issues. Unfortunately, the supply chain seems to have overtaken all the good news about the return of demand within our business. To your question, it's difficult to directly estimate the answer to that. We are building more backlog-- more order backlog.

We've got great visibility to our revenue stream going forward, given that we have built up such a high degree of recurring revenue. So we have a good sense of where things are landing, but it's hard to directly quantify the answer to your question.

MYLES UDLAND: You know, Scott, it's Myles here, and on that revenue question, you know, you guys snapped a streak of five straight quarters of revenue declines, and now you're forecasting basically high single-digit revenue growth. A lot of companies are asking the question of themselves-- is this a pull-forward because of things that have kind of taken place during the pandemic? Or is this a news stream for where the business could head? How have you guys kind of thought about that question for yourselves looking out in maybe three or five years from here?

SCOTT HERREN: Yeah, that's a great question, Myles. I would say it's one that's very difficult, of course, to precisely measure. No one-- if they are putting in pull-ahead orders, no one is coming forward and saying, hey, by the way, I don't actually need this product. I just want to get an order in the pipeline.

But we look at some proxies, right? There's a couple of things you can look at. If we were seeing that activity, for example, what we would see is probably a rise in order cancelations, where companies have placed multiple orders on multiple vendors, and then as they get delivery from one vendor, they cancel the other orders. We're not seeing that.

And I think the other thing where I think that would happen more frequently would be in our larger customers. And one of the data points we gave last night was the growth of our enterprise business, which is our largest customers, has consistently improved over the last several quarters, but it's still flat. Our commercial business, which is that next tier of customer size below, is growing rapidly-- 16% growth in orders last last quarter.

So I think you would see less pull-ahead activity in the smaller size companies. What we're seeing is great growth in that size companies, and an improving environment on the high end.

BRIAN SOZZI: Scott, are you able to raise prices in this environment?

SCOTT HERREN: It's something we always assess. We have made some price adjustments. Given the increase in some of the cost of commodities, we've made some price adjustments very recently in our server business. We continue to assess that. If we go down that path, it's difficult, first of all, to make price adjustments for what seemed to be a temporary issue right now.

But as we continue to assess that, we'll do it very surgically as opposed to something that's more of an across the board path. But it's something that we continually assess.

JULIE HYMAN: You know, Scott, as we try to figure out if this is a temporary issue or not, as you alluded to, what signs are you looking for? I mean, obviously, you guys have vast and deep contacts on your supply chain, right? So what are some early signs you're going to be looking for that, perhaps, this supply squeeze is abating?

SCOTT HERREN: Yeah, I think what we're seeing is a clear case of supply and demand imbalance, right? And that's what's leading to both the shortages and some of the price issues that are out there. And from what we can see-- we have, by the way, for the second year in a row, our supply chain team has been voted the best in the world, right? And that's not just in the tech industry, that's across all industries.

So we have a really talented supply chain team. They are very closely engaged, as you'd expect, given our size-- we're very closely engaged with our suppliers. We feel like the supply side of this begins to loosen up toward the end of this calendar year-- sort of the middle of our fiscal year-- and should improve in the second half.

BRIAN SOZZI: And, Scott, Cisco has been on somewhat of an acquisition spree of late-- really, it's always been in the DNA of Cisco. How hard is it to integrate some of these large businesses? And when will they start to impact your growth?

SCOTT HERREN: You know, this is something that's always been a part of our strategy. As you know, our model generates a fair amount of cash-- round numbers $14 billion of free cash flow a year. We return, between our dividend and share buybacks, between $6 and $8 billion a year, which still leaves us a fair amount of money to invest in growth.

And we do that both organically and inorganically. And we've got a pretty groove swing on the inorganic growth side of things-- both finding the targets that make the most sense for us, doing the work and the due diligence to get through the transaction and the integration phase. So I think we are better than most in terms of driving integration of the targets that we land.

JULIE HYMAN: Hey, Scott, I want to ask you about product and services mix, because you guys traditionally have been a hardware company. You still get the majority of your revenue from hardware. But I know you are migrating and want to migrate further towards software and services. So where are you in that journey? And how rapidly do you think you're going to get to where you want to be?

SCOTT HERREN: Yeah, thanks for asking that question, Julie, because I think one of the best kept secrets about Cisco is-- we announced on this quarter, this most recent quarter last night, our software business was $3.8 billion in revenue over the preceding quarter. If you annualize that out, it's greater than a $14 billion annual revenue stream just from software inside of Cisco.

That would make us one of the top five or six largest software companies in the world. So we've made huge strides on that front. We're continuing to see nice growth. And by the way, when you peel back that $3.8 billion that we announced, more than 80% of it is from subscription and recurring revenue models. And so that gives us the revenue stacking capability that will end up driving growth for us for a long time into the future. So we've made great progress on building out the recurring revenue models across the board, and then seeing them grow-- not just grow healthily, but also grow in a more recurring, subscription model way.

SCOTT HERREN: Scott, thanks for taking the time to talk to us this morning-- hope to catch up with you as the year progresses to see how things are going. Scott Herren is the CFO at Cisco. Thank you.