UPDATED 18:34 EDT / FEBRUARY 12 2020

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Cisco beats earnings forecast but its stock falls on lower hardware sales

Updated:

Cisco Systems Inc. just managed to beat market expectations today with its second-quarter financial results, but its product revenue took a serious hit thanks to declines in application and infrastructure sales.

The world’s largest provider of computer networking gear reported a profit before certain costs such as stock compensation of 77 cents per share on revenue of $12 billion, down 4% from a year ago. That was marginally better than Wall Street’s forecast of earnings of 76 cents on revenue of $11.98 billion.

“I am confident in our long-term growth opportunities as we help our customers build out the networks for the future,” Cisco Chief Executive Officer Chuck Robbins (pictured) said in a statement.

Cisco is the most dominant company in the data center switch market, but the company has struggled to grow in recent years as the majority of enterprise spending goes to cloud infrastructure providers, while hardware sales have slowed.

Cisco executives warned of that in the previous quarter, saying some customers paused their spending plans due to global economic uncertainties related to Brexit and the U.S.-China trade deal.

That prediction came true, as Cisco’s product revenue for the quarter fell 6% year-over-year, to $8.67 billion. Within this segment, infrastructure platforms revenue declined 8%, to $6.53 billion, while application revenue fell 8%, to $1.35 billion. In the company’s other business segments, security sales rose 9%, to $748 million, while “Other Products” revenue jumped 110%, to $46 million. Services revenue was inched up 5%, bringing in an additional $3.33 billion.

Still, Robbins put a brave face on things, telling investors in a conference call that as macroeconomic issues around Brexit and China finally settle, he expects the uncertainty to dissipate and sales to pick up again.

“Given all the economic, geopolitical and coronavirus issues, I think Cisco had a good quarter and forecast,” said Patrick Moorhead of Moor Insights & Strategy. “I think that’s a testament to Cisco’s diversification into software and services.”

That said, Pund-IT Inc. analyst Charles King sees other dark clouds on the horizon that may weigh against significant improvement. “With foreign markets reeling from coronavirus fears, Brexit roiling the EU and the U.S. heading toward a contentiously schizoid election, I wouldn’t bet on it,” he said.

But King thinks Cisco’s management team still could pull it off. “If any vendor is built to survive these crazy times, Cisco is,” he said.

Holger Mueller of Constellation Research Inc. also warned of the challenge Cisco faces due to the coronavirus outbreak, saying that it tends to be the weaker companies that get hit first during adverse conditions, and that Cisco is already weakened from to the ongoing trade wars.

“At the core is Cisco’s challenge to grow its new investments faster than its mature products shrink, and that’s formidable challenge even in healthy markets,” Mueller said. “Cisco’s outlook remains negative, so we will not see the turnaround in 2020. The question for investors is, what will the management do in 2020 to return to revenue growth in 2021?”

A hint of what Cisco might be planning came during its recent Cisco Live EU conference, which took place last month. There, the company announced new tools for its AppDynamics application monitoring platform that allow enterprises to map the performance of their most critical business apps.

The quarter just gone also saw Cisco merge its data center networking business with the enterprise networking group, which provides products such as security software and Wi-Fi access points. Cisco veteran Scott Harrell is leading the new unit, after serving as senior vice president and general manager of enterprise networking for the past two.

Cisco also had time for a small acquisition, buying Australian startup Exablaze Pty. Ltd., which makes ultralow-latency networking devices and chips for financial applications such as algorithmic stock trading.

Cisco’s third-quarter outlook was more or less in line with Wall Street’s forecasts. Executives said they’re expecting earnings in the region of 79 to 81 cents per share, versus the 80-cent analyst estimate.

The company’s stock fell 4% in after-hours trading. Update: Shares were falling almost 6% in Thursday trading.

Photo: Cisco Pics/Flickr

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