Cisco Confirms Networking Slowdown

Cisco Hq2

By: R. Scott Raynovich

Cisco reported decent quarterly growth and profit numbers but weak product order growth for the future confirming the recent trend of a slowdown in enterprise, cloud, and service provider networking spending.

Despite cheers from the some analysts in the Wall St. community and Cisco executives, investors were not pleased, sending the stock down about 8% in trading today. Cisco shares traded down $4.17 to $46.45 in midday trading, nearly 20% off the 52-week high of $58. 

The weak revenue guidance confirms several broader trends in the technology industry -- slower growth reflecting a sluggish global economy and growing hit from the trade war between the U.S. and China. Warning signs have included weak reports and guidance from companies such as Network Appliance, as well as lower capital spending numbers reported by service providers and cloud computing leaders. 

For the last quarter of its fiscal year 2019, Cisco reported revenue of $13.4 billion, up 6% from the same period last year. The company reported non-GAAP operating margin of 32.6%, up 1.4 points. Non-GAAP net income was $3.6 billion, up 9% and non-GAAP EPS was $0.83, up 19%. However, the company reported flat product order growth of 0%, and the company said that revenue growth would be in the 0-2% range for the next quarter.

Cisco blamed a number of factors, including the trade war with China and a plunge in service provider orders. Service provider orders dropped 21% year-over-year, with a large portion of that coming from Cisco's Chinese customers -- although China now represents less than 5% of Cisco's business. Other factors included weak comparisons with last year, which was boosted by tax incentives, and economic softness in the U.K. 

There were some bright spots, as Cisco reported growth in wireless and data-center portfolios. Applications revenue was up 11% with collaboration, AppDynamics and IoT software all up double digits. Security increased 14% with strong performance in identity and access, advanced threat, unified threat and web security.
 
But it's clear that the trade war is weighing on Cisco, as regions such as Asia and emerging markets were particularly weak. For example, orders from the Asian-Pac region including Japan and China, which Cisco calls "APJC" was down 8%. Emerging markets were down 8% and the BRICS plus Mexico was down 20%. 
 
Cisco executives appeared to shun any kind of pessimism on the conference call, focusing almost entirely on positives -- pointing to year-over-year revenue growth and the transition to a software business model. 
 
"We continued our business model transition with software subscriptions now at 70% of total software revenue up 12 points year-over-year," said CEO Chuck Robbins. 

"We are innovating across every facet of our portfolio integrating AI, automation, security and assurance into our Nexus switching platforms and our 400 gig offerings. This quarter, we delivered data center network insights providing critical analytics and proactive network management capabilities through automation to increase our customers' ability to troubleshoot and remediate their environments."

Robbins also stressed cybersecurity, one of Cisco's areas of strongest growth. 

"Cyber security continues to be the top priority for our customers, driving another consecutive quarter of double-digit growth," said Robbins. "As the industry leader in networking and cyber security, we are investing in and extending our subscription-based security innovations across all networking domains in today's zero trust environment."

Cisco ended the quarter with total cash, cash equivalent and investments of $33.4 billion. Operating cash flow was $3.9 billion, down 4%. The company spent $4.5 billion on share repurchases and $1.5 billion on the quarterly dividend.