Cisco Shares Slammed on Soft Quarter

Cisco Hq

By: Mary Jander

Cisco (NASDAQ: CSCO) failed to excite in its fiscal-first-quarter report last night, showing paltry revenue growth, reductions in product orders, and sales dips in all geographies. It also issued lackluster revenue and earnings guidance.

Investors punished the stock. In early morning trading today, shares were down $3.70 (7.5%) to 44.75, close to the 52-week low of $40.25.

The company blames what CEO Chuck Robbins referred to as “a bit of a pause” in spending across all customer segments — especially service providers, where sales dropped 13 percent y/y (year-over-year), just as they did last quarter. Overall, product orders were down 4 percent y/y. But Futuriom pointed after Cisco's last quarterly conference call that this "pause" has evident for almost a year now, as service providers and cloud providers alike slow down capital spending on major projects.

Cisco executives insist the company is meeting internal milestones in its ongoing shift from a hardware-centric business to one primarily based on software and services. And regardless of macroeconomic forces, Cisco says it’s working on strong offerings in cloud, automation, 5G, security, and collaboration.

"With software subscriptions now at 71 percent of our software revenue, we are making good progress in transforming our business model,” stated CFO Kelly Kramer in a prepared statement.

The question will be whether Cisco can move fast enough to retain leadership in an increasingly complicated and competitive environment.

Cisco’s latest report for the first quarter of fiscal 2020 shows revenues of $13.2 billion, up 2 percent y/y but down from $13.4 billion last quarter. Non-GAAP operating margin was 33.6 percent, up 1.3 points y/y. Non-GAAP earnings per share was 84 cents, up 12 percent y/y but flat sequentially.

Capital Spending Slowdown

Cisco says its main challenges remain an overall spending slowdown across all customer categories: Besides the woeful drop in service provider sales, enterprise revenue dropped by 5 percent y/y, and commercial customers (companies using Cisco to transact large retail and consumer-facing businesses) dropped 5 percent. And even though public-sector sales were up 6 percent, that failed to lift overall revenue the way it did last quarter.

Geographically, Cisco saw sales decline 3 percent y/y in both the Americas and EMEA, while the Asia-Pacific region was down 5 percent. As a subset, sales in China were down 31 percent -- and will likely just keep trending downward, Kramer noted.

White-Box Woes?

Someone asked last night whether the sales slowdown is the result of Cisco products getting displaced by white-box CPE (customer premises equipment), which is often seen as an artifact of big firms moving to software-defined wide-area networking (SD-WAN). CEO Chuck Robbins denied the white-box factor, but his answer sounded wobbly.

“It feels like there’s a bit of a pause,” he said. “We saw things like conversion rates on our pipeline were lower than normal…. We didn’t see any incremental loss ratios, it was really just stuff slipping. We saw some large deals get done but done smaller.”

This revenue slippage, especially with service providers, could be bad news for Cisco. Futuriom’s latest premium research report reveals that service providers are stepping in to fill a growing demand for SD-WAN managed services.

Further, Cisco has suffered from competitors' focus on helping customers eliminate routers and switches. And Cisco remains wedded to hardware-based licensing. Execs clarified that even though 71 percent of its software sales this quarter came from subscriptions and software-as-a-service (Saas), the term subscriptions still includes term licenses for switches and other hardware.

Book Us on That Security Boat

A bright spot for Cisco is its commitment to cybersecurity, which reflects an industry-wide focus. Security is also a driver for SD-WAN and cloud infrastructure spending.

Cisco is claiming a piece of the action. This month the company announced a series of enhancements to its products based on threat intelligence and analytics. The firm also released news about security features of its cloud-managed Meraki switches and access devices.

Cisco aims for innovations that will preserve its status as an IT superpower. “While we remain in a challenging macroeconomic environment, I’m proud of our progress.... We have a clear vision and strategy and are executing well against it to capture the many opportunities ahead.”

There is plenty of opportunity. But Cisco’s past success could prove an obstacle to its future. Cisco is a pillar of traditional IT — an enormous pillar. Getting around it continues to be its biggest challenge.