Cisco Introduces New Metrics to Showcase Shift Toward Software

ARR, a performance metric not aligned with U.S. Generally Accepted Accounting Principles, will provide information about annualized revenue generated by selling subscriptions, term licenses and maintenance contracts. Subscriptions as a percentage of total revenue will capture the proportion of revenue made from sales of software and security licenses, software-as-a-service products and service arrangements, the company said.

The idea behind the two new metrics is to illustrate the company’s shift toward software and recurring revenue, Chief Financial Officer Scott Herren said.

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

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

The company doesn’t plan on giving quarterly guidance for the new metrics, Mr. Herren said.

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

“Investors have been asking for more visibility into our software transition,” Cisco Chief Executive

Chuck Robbins

said, adding that a greater share of recurring revenue will bring more predictability for the business.

Cisco’s stock price has risen by more than 30% since the beginning of the year. Still, the shares have traded lower than those of competitors such as

Microsoft Corp.

,

International Business Machines Corp.

and

VMware Inc.

Cisco’s stock also trades lower than shares of pure-play software firms 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, which is broadly in line with IBM’s but lower than that of other technology companies, 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 because of Cisco’s higher share count.

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

Analysts said the new metrics are aimed at boosting Cisco’s share price, as recurring revenue from software sales in general is generally valued higher by the market than one-time sales of software or one-time sales of switches and sensors.

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

Mr. Herren said Cisco wouldn’t have to make a major acquisition to meet the targets that it outlined on Wednesday, including growing revenue by an average rate of 5% to 7% a year by fiscal 2025.

James Fish, a director at 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, they are still very much a hardware-driven company,” said Mr. Fish.

Write to Nina Trentmann at [email protected]