Cisco: Product sales jump, so do some prices

From Cisco's year-end earnings call: Its software strategy is working, 400G Ethernet is on the march, chip-supply shortages remain an issue.

Data center / enterprise networking
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Cisco’s 4Q and year-end financial reports highlight growth in many categories that are important to enterprise customers including wireless, campus switching, routing and security products.

CEO Chuck Robbins said that the company’s fourth quarter boasts the strongest product-order growth rate the company has seen in over a decade, citing a 30% product order growth year on year, and more than 17% order growth versus pre-COVID Q4 fiscal 19 product bookings.

“In Q4, we saw double-digit revenue growth in campus switching, Catalyst 9000, high-end routing, wireless, and in our Zero Trust solutions, along with strength in our security endpoint portfolio. We also had a very strong adoption of our Acacia optical solutions,” Robbins said.

He also addressed the company’s progress shifting toward software and services, challenges of the processor shortage, and the growth of 400Gbps gear.

The Cisco software story

Cisco began moving wholeheartedly into software several years ago, and that move is paying off—literally.  The company said software sales bested $4 billion—about 31% of the vendor’s total revenue during its fiscal year 2021 fourth quarter. The numbers represent an increase of 7% over the third quarter and 6% year-over-year, Robbins said.

The company has said this growth makes it one of the largest software companies in the world—a point it reiterated this week.

“The benefits of our shift to software and subscriptions are clear and they are helping both Cisco and our customers move with greater speed and agility,” Robbins said during the earnings call. “For perspective, software represented 31% of our business in Q4, and for the full year, when combined with our services business, they represent over 53% of revenue, clearly highlighting the success of our continued business transformation.”

In additions, Cisco’s subscription revenue grew 9% in Q4 and 15% for the full fiscal year, according to the company.

The software growth dovetails with Cisco’s move toward a consumption-based selling and pricing structure as well, Robbins said.

“Over the last year, we introduced an impressive number of new capabilities across our entire portfolio, while also doubling down on more flexible consumption models, including our core networking capabilities as a service highlighted by the recent launch of Cisco Plus,” Robbins said. 

The Cisco Plus network-as-a-service promises to deliver networking, security, compute, storage, and applications with unified subscriptions that are simple to use, Cisco says.

While the company plans in the next few years to introduce what will likely be myriad service options under Cisco Plus, for now it features just two. The first, Cisco Plus Hybrid Cloud, includes the company’s data-center, compute, networking, and storage portfolio in addition to third-party software and storage components all controlled by the company’s Intersight cloud-management package. Customers can choose the level of services they want for planning, design and installation.

“While still in its early days, Cisco Plus directly aligns with our transformation goals around driving more subscription-based recurring revenue via the cloud,” Robbins said.

Chip shortage, price hikes

The tech industry continues to feel the impact of the semiconductor shortage. In Cisco’s case, Robbins said he expected the supply challenges and cost impacts to continue through at least the first half of the company’s fiscal year and potentially into the second half. 

The shortage has raised prices on some Cisco gear.

“We did put in place a price increase; very selective, very targeted, only on the products where we were seeing the higher component costs,” Scott Herren, Cisco’s financial officer told analysts on the financial call. “That went into effect August 7th, but we always honor quotes that are out there for 30 days, beyond that price because it goes—maybe those quotes were produced before the price increase was put in.”

Cisco’s competitors are feeling the pinch too with Arista’s CEO and president Jayshree Ullal recently summing the situation up like this: “This is the worst I’ve seen it. And there have been some big ups and downs. And more than the worst I’ve ever seen it, I think it’s also going to be prolonged,” Ullal told analysts at that company’s recent financial call. Everything from copper shortages and wafers to manpower, logistics, and freight has been impacted, Ullal stated. 

400G ethernet growth

The move toward 400Gb ethernet gear has been gradual, but the need for increased speeds in high-end data centers and cloud-service companies is increasing, especially now with so many remote and hybrid workers needing robust access speeds.

Cisco gave an indication of how the 400G ramp-up is going.

 “In Q4, 400G ports, our orders were up 668%, and for the year, 400G port orders were up 831%,” Robbins said. “We have over 400 customers that have deployed, and we’ve taken orders for almost 180,000 ports total.”

The Dell Oro Group recently wrote that the emergence of new products will be a big overall growth driver over the next five years.

“Network operators see 400G as a logical step to increasing network capacity at lower costs for hardware and operations. The ecosystem of 400G technologies, from silicon to optics is ramping, and throughout 2020 a broad range of routers supporting 400G will become commercially available,” wrote Shin Umeda, Dell Oro vice president in a blog about 400G growth.

“Starting in 2021, large-scale deployments will contribute meaningful market. By 2024, we expect 400G to generate almost $3 billion in manufacturers’ revenue and to be widely deployed in all of the largest core networks in the world,” Umeda wrote.

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