Cisco’s Q1 Record Backlog but Supply Chain Challenges

We are maintaining our $54 fair value estimate for narrow-moat Cisco Systems CSCO after its first-quarter results. Revenue growth was lower than we expected as Cisco was affected by supply chain challenges, which also led to adjusted earnings being slightly lower than our anticipations for the first quarter. With a record backlog, robust product orders, and pricing actions that are expected to help in the back half of fiscal 2022, the company maintained its previous 2022 revenue growth range of 5%-7%. While this means Cisco needs to make up sales in the back half amid a supply constrained environment, we view the target achievable with the robust backlog and robust remaining performance obligations providing visibility. Shares fell over 7% after reporting, and we see shares as fairly valued with our long-term view. We continue to view Cisco as solid operator and shareholder-centric firm that can weather near-term turbulence, especially as it continues to expand its recurring revenue base of software and services.

Cisco’s year-over-year 8% revenue growth came from product increasing by 11% while services grew by 1%. Product orders were up 33% year over year, with broad based strength coming from enterprise up 30%, public segment up 10%, commercial up by 46%, and service provider up 66%. We believe Cisco is experiencing strength from organizations spending to update their networking infrastructure to handle the dispersed nature of hybrid working, and also upgrading local and wide area wired and wireless connections to facilitate higher bandwidth demands. As organizations reopen, we see the legacy networking infrastructure becoming overtaxed and requiring an upgrade. Specific to service provider, we think Cisco is starting to see the strong demand expected from 5G networks requiring underlying networking upgrades, and Cisco’s webscale business is booming as those organizations move to 400Gb systems and expand their data center operations.

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