Cisco’s CEO: Telco sales weakness reflects ongoing inventory digestion phase
Cisco may hold a dominant spot in the router and optical networking segments, but it faces a common challenge: slow sales in the telecom industry as providers work through their product inventories.
Chuck Robbins, CEO and chairman of Cisco told investors during its fourth-quarter and fiscal-year-2023 earnings call that a lot had stayed the same in the service provider industry.
“On the service provider side, I suggest Q4 for the telco side of it, the communications service provider was consistent with what it was the quarter before,” he said. “It's just relatively weak right now. Many of these customers are digesting much of the infrastructure they bought over the next few months.”
However, Robbins added, "Our team believes that orders will stabilize on the telco side of the business in the second half of our fiscal year.”
Positioning for hyper scalers, AI
While the traditional telcos are in a transition phase, Cisco is seeing growing opportunities in AI and hyperscaler providers.
Earlier in the quarter, Cisco introduced its new security service edge (SSE) solution, Cisco Secure Access AI technologies, across its collaboration and security portfolios. Focused on the hybrid work environment, the vendor unveiled new elements across Firewall, Multicloud, and Application Security. Cisco Secure Access will be in limited availability starting in July 2023 and will be Generally Available in October 2023.
“While AI has been an important element in our products for several years, this quarter, we announced new AI technologies across our collaboration and security portfolios designed to boost productivity, enhance policy management and simplify tasks,” Robbins said.
Additionally, Cisco introduced new AI scale infrastructure innovation that allows its customers to process AI workloads more efficiently. Robbins said, "Cisco's ASIC design and scalable fabric for AI position us very well to build out the infrastructure that Hyperscalers and others need to build AI/ML clusters.”
Cisco expects that Ethernet will be the dominant technology connecting AI workloads over the next five years. Cisco joined AMD, Arista, Broadcom, Eviden (an Atos Business), HPE, Intel, Meta and Microsoft to form the Ultra Ethernet Consortium (UEC)
The UEC brings together several household name companies to enable industry-wide cooperation to build a complete Ethernet-based communication stack architecture for high-performance networking. According to the new group, the Ultra Ethernet solution stack will capitalize on Ethernet’s ubiquity and flexibility for handling a wide variety of workloads while being scalable and cost-effective.
“We expect Ethernet will lead in connecting AI workloads over the next five years,” Robbins said. “To accelerate this transition, Cisco became a founding member of the Ultra Ethernet Consortium, an industry-wide effort to drive open large-scale Ethernet-based fabrics for high-performance networking.”
Additionally, Cisco introduced its Silicon One. Cisco Silicon One provides one architecture that can be deployed across customer networks, from routing roles to web-scale front-end networks to web-scale back-end networks. The company claims this can reduce deployment timelines while minimizing ongoing operations costs by enabling a converged infrastructure.
Robbins said, "Silicon One switching ASICs will support large-scale GPU clusters for AI and ML workloads.”
Pursuing 400, 800G opportunities
Along with enabling customers to take part in supporting AI, Cisco is eyeing new 400 and 800 Gbps opportunities.
Cisco’s timing could not be any better. Dell’Oro forecasts that 20 percent of Ethernet Data Center Switch ports will be connected to accelerated servers to support Artificial Intelligence (AI) workloads by 2027.
According to the research group’s Ethernet Switch – Data Center 5-Year July 2023 Forecast Report, nearly half of the data center switch ports will be driven by 400 Gbps speeds and higher by 2027. Moreover, the service provider forecasts that 800 Gbps is expected to eclipse 400 Gbps by 2025.
The vendor has been enhancing its presence as a supplier of 400 and 800 Gbps solutions in recent years.
We are also piloting 800 gig capabilities for AI training fabrics. Overall, Cisco is committed to helping our customers navigate this transition in a trusted and responsible way to deliver on the full promise of this technology, and we are well-positioned to win.
“We've had great success with 400 Gbps, and it's been growing quite significantly,” Robbins said. “Over the last few years, we've been rebuilding or building our presence in this space.”
Cisco is also prepared to address customers’ 800 Gbps needs as they arise. Earlier this year, Cisco introduced a new 28.8Tbps / 36 x 800G line card and improved control software for its Cisco 8000 Series routers. In a blog post, Cisco said the 28.8T line card is built on Cisco’s Silicon One P100 ASIC and brings 800G capability to the modular Cisco 8000 Series Router, which can scale to 230Tbps in a 16 RU form factor with the eight-slot Cisco 8808, and up to 518Tbps in the 18-slot chassis.
“On the 800 Gbps, it's just a matter of we're engaged there,” Robbins said. “We're installed already and got the trust of these customers. And I think we're just in the game at the right time as opposed to where we started.”
Software services dominate revenues
Cisco’s revenue mix continues to reflect the company’s movement of its business to revenue-based offerings driven by higher levels of software and subscriptions. Total product revenue was 11.7 billion, up 20%.
“We continue to make progress on the transformation of our business to more recurring revenue-based offerings driven by higher levels of software and subscriptions,” Robbins said. “We saw solid performance in our Annual recurring revenue (ARR) of 24.3 billion, which increased 5% with product ARR growth of 10%.”
Total software revenue rose to $4.6 billion, a 17% increase, with software subscription revenue up 20%. Cisco said 85% of our software revenue was subscription based. Total subscription revenue was 6.6 billion, an increase of 13%.
Service revenue was 3.6 billion, up 4%. Within Cisco’s product revenue segment, Secure Agile Networks, its most significant product category, rose 33%. Switching revenue had double-digit growth with strength in both campus and data center switching driven by its Catalyst 9000 Nexus 9000 and Meraki offerings.
Enterprise routing declined, driven primarily by Access, partially offset by strength in its Catalyst 8000 Series SD-WAN and IoT Routing. Driven by its Wi-Fi 6 products and Meraki wireless offerings, wireless saw double-digit growth. Internet for the Future was up 3% due to an increase in its core routing products, including solid growth in its Cisco 8000 offering.
Robbins said that the company expects corresponding market share gains as Cisco's backlog cleared. “We gained over three percentage points of market share year-over-year in our three largest networking markets--Campus switching, wireless LAN and SP routing,” he said. “We expect further share gains in these areas.”
Cisco ended fiscal 2023 with fourth-quarter revenue of $15.2 billion, up 16% year over year. For the fiscal year 2023, Cisco reported $57 billion in revenue, an 11% year-over-year increase.
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