UPDATED 19:19 EST / NOVEMBER 13 2019

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Cisco warns of revenue decline amid ongoing economic weakness

Updated:

Black clouds are looming on the horizon for Cisco Systems Inc., which reported better-than-expected fiscal first-quarter results today only to follow up with guidance that fell short of expectations.

For its first quarter fiscal 2020, Cisco reported a profit before certain cost such as stock compensation of 84 cents per share on revenue of $13.2 billion, up 2% from a year ago. It was a relatively strong performance, since Wall Street had forecast earnings of just 81 cents per share on revenue of $13.09 billion.

But whatever optimism that might have generated was quickly washed away, with Cisco saying it expects a notable decline in revenue in the next quarter, putting the blame on a “challenging macro environment” that’s leading some of its major customers to put a pause on their spending.

For the current quarter, Cisco expects revenue to decline by about 3% to 5% from a year ago, with a profit of 75 to 77 cents per share. Analysts had earlier forecast a second-quarter profit of 79 cents per share on revenue of $12.77 billion, up 2.8% from a year ago.

That was enough to send investors fleeing, with Cisco’s stock falling 5% in after-hours trading. Update: Shares fell nearly 8% in Thursday trading.

Charles King of Pund-IT Inc. told SiliconANGLE that Cisco’s caution regarding the upcoming quarters was “sensible realism,” noting that economic and political uncertainties tend to make businesses jittery, which in turn leads to a pull back on information technology purchasing and upgrade plans.

“Quick and happy resolutions of those issues would help things return to normal, but that would be a mug’s game in current circumstances,” King said. “It’s better for Cisco to put a damper on expectations and take a few minor lumps. If things turn out for the better, all’s well anyway. But if things stay the same or even go a bit further south, the company can say, ‘I told you so.'”

Investors probably should have seen signs that trouble was brewing in any case. Cisco had indicated in its fourth-quarter earnings call that it was seeing some weakness in the challenging macro environment. Now, executives say, that weakness continued throughout the first quarter and was broader than anticipated.

“While the main challenges continue to be service providers in emerging markets, this quarter, we also saw relative weakness in enterprise and commercial,” Cisco Chief Executive Officer Chuck Robbins (pictured) said on a conference call with analysts. “Despite these headwinds and because of key decisions we made four years ago to change our business model, we remain well positioned to capitalize on the tremendous opportunities across cloud, automation, 5G, security and collaboration.”

Digging into the numbers, Cisco reported Product revenue of $9.87 billion, up 1% from a year ago, and Service revenue of $3.2 billion, up 4%. On the downside, Infrastructure Platforms revenue fell 1% to $7.45 billion. Among Cisco’s smaller business units, Applications revenue rose 6%, to $1.49 billion, and the bright spot was Security, whose revenue grew 22%, to $815 million.

Analyst Holger Mueller of Constellation Research Inc. said the infrastructure revenue decline is significant, because the rest of its businesses are unable to make up for the shortfall. That’s why its overall revenue is stagnant, he said.

“Cisco needs to find a moment to stop the sickness, the divestiture of its video services business did not do the trick,” Mueller said. “Weak regional performance in Asia – a key growth market – did not help either, neither did the relatively high restructuring costs. But way out is easier said than done.”

What Cisco needs to do, according to Mueller, is fund more innovation paths that can help to pull in more customers for its infrastructure business.

“A large installed base and steady R&D expenses make technology innovation spurring growth a tangible strategy, so the pressure is on product innovation and its monetization,” Mueller said.

Despite the outlook, Moor Insights & Strategy analyst Patrick Moorhead said he thought Cisco had delivered strong results in a tough market.

“This was better than I expected,” Moorhead said. “I was pleased to see double-digit growth in the App Dynamics and Security business as these are growth areas. In concert with this, software as a subscription was up, 12% which is positive given it’s at 71% of the total. This is important for business transformation.”

Photo: Cisco Pics/Flickr

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