expects annual revenue growth of between 5% and 7% through the July 2025 fiscal year, driven by continued expansion of its subscription businesses, the company said Wednesday.
Cisco (ticker: CSCO) made the forecast at a half-day meeting with investment analysts, the first such session the networking giant has held since 2017.
Cisco projects 15% to 17% growth in subscription revenue on a compounded annual basis through 2025, with 2% to 4% growth in non-subscription businesses, and 2% to 3% growth in services. By the end of the period, Cisco sees subscription revenue accounting for 50% of overall revenue, up from 30% in the latest fiscal year. Cisco sees non-GAAP profits increasing in line with revenue growth, at 5% to 7% a year.
Chief Financial Officer Scott Herren said in a Q&A on the call that the company sees potential to increase gross margins over time, but notes that Cisco also sees lingering tightness in component supplies—and that the company continues to invest aggressively in new opportunities.
The new guidance is consistent with Cisco’s previous forec ast of 5% to 7% revenue growth for the July 2022 fiscal year. In fiscal 2021, Cisco posted revenue of $49.8 billion, with profits of $3.22 a share. Cisco reiterated its forecast for fiscal 2022 profits of $3.38 to $3.45 a share. At the midpoint of the guidance ranges, Herren notes, the company would top $60 billion in revenue and $4 a share in profits by the end of the forecast period.
In a move intended to highlight the company’s growth businesses and provide more insights into the business, Cisco is also changing the way it reports financial results, shifting from three segments—infrastructure platforms, applications, and security—to five new segments.
The new “secure, agile networks” segment includes switching, routing and wireless products. “Hybrid work” covers collaboration and contact center products, like WebEx. “End-to-end security” as the name implies is the company’s security business. ”Internet for the future” includes optical networking, 5G, and optics products. “Optimized application experiences” includes “observability” analytics products and cloud-based platforms
Cisco didn’t provide any financial breakdown on those segments, but Herren said in an interview with Barron’s that the company will provide the Street with three years of historical quarterly data before the next quarterly earnings report. The company isn’t planning to provide quarterly guidance on the individual segments, he added.
Cisco said it sees a $400 billion addressable market in its current businesses by fiscal 2025, up from an estimated $290 billion in 2021—with another $500 billion of opportunity in adjacent businesses. Asked about how the company will address the additional opportunities, Herren said Cisco can expand through both organic growth and M&A. He also noted that the revenue guidance the company provided through 2025 doesn’t assume any major acquisitions.
In another move intended to persuade investors to evaluate Cisco as a software company, Cisco is also steering the Street toward some new metrics to evaluate its business. Those metrics include subscription revenue as a percentage of total revenue; annual recurring revenue, or ARR; and remaining performance obligations, or RPO. Both ARR and RPO are measures commonly used by cloud-based subscription software businesses. CEO Chuck Robbins told Barron’s that the company had just over $3 billion in subscription revenue when he became CEO in 2015, and the total is now about $12 billion, growing 23% over the period on a compounded annual basis.
On the call, Herren said ARR was $22.3 billion as of the end of fiscal 2021, up 11% on a two-year compounded average rate. RPO at year-end was $30.9 billion, up 10% on a two-year compounded annual rate—the total includes $16.3 billion of current RPO, expected in the next 12 months.
On the topic of capital allocation, Herren said Cisco remains committed to returning at least 50% of free cash to holders. There had been some hope on the Street that Cisco might take a more aggressive approach to capital return—the stock dropped into the red for the day when Herren addressed the topic. The CFO notes that the company has about $8 billion left on its existing stock repurchase authorization.
Asked about the more than four-year gap since its last analyst meeting, Herren said Cisco plans to make the meeting an annual event going forward.
Cisco on Wednesday fell 0.5% to $57.56.
Write to Eric J. Savitz at [email protected]