For more than a decade, Cisco has used its substantial financial resources to keep disruption at bay. While its bread-and-butter business has always been, and remains, networking equipment, for much of the last 15 years, it has tried to morph into a software and services company by buying up smaller tech firms regularly.
As I wrote last year, the company has bought 30 startups over the past several years, and it has a long history of building its business on top of acquired entities. If you go back to its origins in the ’90s, Cisco has been involved in more than 200 acquisitions.
The approach has helped the company report decent revenue growth over the years, but the disruption dogs might have finally caught up. Its latest quarterly results, while not downright ugly, did appear to show a company treading water.
The bad news goes beyond the numbers
For starters, Cisco said revenue was flat from a year earlier at $12.8 billion, while analysts were expecting $13.3 billion — a substantial gap. Unfortunately, the bad news didn’t end there.
“Even when the supply chain issues are solved, Cisco must find a way to innovate and monetize in networking — something it has been struggling with over the last four to six years.” Holger Mueller, analyst at Constellation Research
The company also expects current-quarter revenue to fall 1% to 5.5%. That’s quite a broad range, but any way you slice it, we’re looking at a decrease while analysts were anticipating growth of around 6%.
The next year looks blah as well, with growth pegged at a mere 2% to 3%. To be clear, that’s better than declining revenue, but it looks like the company’s acquisition strategy might not be doing enough to compensate for the lack of revenue from its networking hardware business.
Why does it matter if the revenue growth is slow? Well, slowing revenue growth can turn negative, and it implies that the company’s profitability in the future will be constrained by its current size.
Given that its rivals’ revenues are rising, and therefore they have more potential upside, declining revenues could make it harder for Cisco to hire and buy — who wants to work for a company when your equity compensation has limited potential for growth? — and it’s harder to buy other companies with a stock that is in the doldrums.
We’ve seen public tech companies that fell, or flirted with, single-digit growth wind up under external pressure to sell, sack leadership or break into smaller pieces. Given that Cisco likely doesn’t want any of those things to happen, the rate of revenue growth is critical.
Revenue type matters as well
Lately, Wall Street hasn’t been kind even to companies that have posted substantial increases in revenue. So perhaps it wasn’t surprising when Cisco’s stock dropped 13% the day after it reported.