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Cisco Introduces New Metrics to Showcase the Evolution to Software

Network equipment maker Cisco Systems Inc. plans to introduce new financial metrics and revise its reporting segments to highlight growth in its software business.

Cisco based in San José, California,

which sells routers, switches and security services as well as software products such as its Webex meeting app, said on Wednesday that it will begin reporting annual recurring revenue and subscriptions as a percentage of total revenue in November.

ARR, a performance measure not aligned with US generally accepted accounting principles, will provide information on the annualized revenue generated from the sale of subscriptions, term licenses and maintenance contracts. Subscriptions as a percentage of total revenue will capture the proportion of revenue from sales of software and security licenses, software as a service products and service arrangements, the company said.

The idea behind the two new measures is to illustrate the company’s transition to software and recurring revenue, said CFO Scott Herren.

“What I wanted to do is introduce new metrics to help investors understand the transformation,” Herren said.

Software sales accounted for 30% of total revenue in fiscal 2021 and accounted for 31% of that revenue in the fiscal quarter ended July 31, the company said. The company wants subscriptions to generate 50% of its annual revenue in its 2025 fiscal year, up from 44% in the fiscal year ended in July. Cisco reported revenue of $ 49.82 billion for the year, up 1% from the previous year. Net profit was $ 10.59 billion, down 6%.

The company does not plan to give quarterly advice for the new measures, Herren said.

Cisco CFO Scott Herren.


Photo:

Cisco Systems

Cisco is also reorganizing its existing product categories, which are infrastructure platforms, applications and security, Herren said. “We’re moving away from those three,” he said, adding that the company wanted to align its categories more closely with customer needs. Cisco will divide five categories from November: secure and agile networks; hybrid work; end-to-end security; Internet for the future; and optimized application experiences.

“Investors have asked for more visibility into our software transition,” said Cisco CEO Chuck Robbins, adding that a greater share of recurring revenue would bring more predictability to the business.

Cisco’s stock price has risen more than 30% since the start of the year. Still, stocks traded lower than those of competitors such as Microsoft. Corp.

, International Business Machines Corp.

and VMware Inc.

Cisco shares are also trading at a lower level than outright software companies such as Zoom Video Communications Inc. and RingCentral. Inc.

Cisco’s price-to-earnings ratio, which measures its current share price relative to its earnings per share, stands at 23.41, broadly in line with IBM but lower than other companies technologies, including VMware, Microsoft and Zoom, according to data provider FactSet.

The company’s market capitalization, however, stands at $ 244.1 billion, according to FactSet, which is higher than that of IBM, RingCentral, VMware and Zoom due to the higher number of Cisco shares. .

Cisco shares were trading at $ 58.48 on Wednesday afternoon, up about 1% from Tuesday’s close.

Analysts said the new measures are aimed at boosting Cisco’s stock price, as recurring revenue from software sales in general is typically more valued by the market than one-off software sales or one-off sales of switches and devices. sensors.

“They are trying to convert their existing business into a new business model,” said Jeff Kvaal, director of Wolfe Research LLC, a research provider. “That is to say to [Wall] Street, you haven’t properly assessed my business model in the past, ”Kvaal said.

Mr Herren said Cisco would not have to make a major acquisition to meet the goals it set out on Wednesday, including revenue growth at an average rate of 5% to 7% per year by ‘fiscal year 2025.

James Fish, director of financial services firm Piper Sandler Cos., Said Cisco should pursue more mergers and acquisitions to grow its software business.

“At the end of the day, it’s still a hardware-driven business,” Fish said.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

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