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Cisco earnings foreshadow slowdown in tech spending

The latest Cisco earnings report indicated a weakening in business confidence as economic uncertainties lowered tech spending by enterprises and other segments.

Cisco blamed political turmoil on the world stage for a slowdown in tech spending that will drive the company's overall revenue down in the current quarter.

The latest Cisco earnings report, released this week, reflected a "pause" in spending by companies globally, Cisco CEO Chuck Robbins told financial analysts. The number of product orders in the quarter ended Oct. 26 fell in three customer segments -- enterprise, commercial and service provider. Only the government sector showed positive growth.

"It feels like there's a bit of a pause [in spending]," Robbins said during the company's quarterly earnings call.

The slowdown led to only a 2% increase in revenue, to $13.2 billion in the first quarter of the 2020 fiscal year. Revenue in the previous quarter rose 6% year over year. For the current quarter, Cisco said revenue would drop between 3% and 5%.

Tight control on expenses last quarter drove net income up 5%, to $3.6 billion. Cisco earnings per share rose 12%, to 84 cents.

Global strife causing business jitters

Several events globally were making tech buyers nervous enough to delay spending, Robbins said. They included anti-China protests in Hong Kong, the trade war between China and the United States, England's messy exit from the European Union, impeachment hearings in the U.S. Congress and political turmoil in Latin America.

It feels like there's a bit of a pause [in spending].
Chuck RobbinsCEO, Cisco

"Business confidence just suffers when there's a lack of clarity," Robbins said.

As a result, a significant number of deals were smaller than expected, some fell through and others were delayed, he said.

Cisco, considered a bellwether of tech spending, reported in August a global weakening in demand. But while spending fell in the service provider customer segment, the rest had positive growth.

Last quarter, Cisco continued to struggle in the Chinese and service provider markets. Revenue in China fell 31%, compared with a 26% drop in the quarter ended July 27, while service provider orders fell 13%.

Service provider spending has fallen for several quarters. However, Cisco has predicted that sales would pick up next year, when it expects carriers to start overhauling their networks to support plans for 5G business services.

Within Cisco, the decrease in service provider sales is reflected in lower enterprise routing revenue. Also, enterprises are spending less on data center routing as they move their business software to public clouds.

"Cisco's product lines are strong," Patrick Moorhead, principal analyst at Moor Insights & Strategy, said. "But the company's core market, enterprise routing, isn't growing a lot."

Cisco predicts spending recovery

Eventually, several industry trends will force businesses to increase spending, Robbins said. Companies will need new technology to take advantage of carriers' 5G wireless networks and the higher bandwidth of the new Wi-Fi 6 standard. The increase in data traffic from those next-generation technologies would, for example, drive sales of 400 Gigabit switches.

"Technology is so absolutely core to their fundamental strategies that it just seems to me that the time that they're going to be able to pause will be shorter than what you've seen in the past," Robbins said.

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