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Latest Cisco earnings show tech buyers remain skittish
The latest Cisco earnings report shows customers paused tech spending despite a stabler global economy, while the impact of the coronavirus outbreak in China was a looming unknown.
Cisco forecasted another quarter of revenue decline as customers remained cautious over the global economy and the impact of the coronavirus outbreak in China.
Cisco said this week it expected revenues to contract between 1.5% and 3.5% in the current quarter. The drop followed a 4% decline to $12 billion in the second fiscal quarter ended Jan. 25.
Cisco's forecast was part of the company's second-quarter earnings report, which listed declines in product sales and orders. CEO Chuck Robbins told Wall Street analysts during a conference call that he believed the slowdown was temporary.
"When I speak to the customers, they're still fully planning on moving forward. They're just a little cautious in trying to see what's going on," Robbins said. "We obviously have the virus now, but we'll see how it plays out."
While the coronavirus was an uncertainty, other recent events were encouraging customers to consider spending again, Robbins said. The developments included a final decision by the United Kingdom to leave the European Union, a first-round deal in the U.S.-China trade dispute, and the passage of a trade deal between the United States, Canada and Mexico.
Cisco service provider revenues remain weak
Cisco's second-quarter results showed the company had yet to reverse a long string of quarterly declines in the service provider market. Revenue dropped 11%, and Robbins did not anticipate much improvement until 2021.
Cisco expects to benefit from a ramp-up in spending next year as carriers rearchitect their networks to provide 5G services to businesses. Cisco products aimed at the market include 400 Gbps switches and the newly launched Silicon One chipset. The latter will power the vendor's new 8000 series routers. Cisco also plans to make the chip available as a stand-alone product for service providers that want to use it in white box networking hardware.
The Trump administration had suggested the United States and its allies invest in European 5G suppliers Ericsson and Nokia. The administration argued the investments would make the companies stronger competitors against Chinese rival Huawei. Robbins said U.S. companies and the European firms had competitive technology and didn't need government intervention.
"I actually think the U.S. is in fine shape," Robbins said. "I don't think the U.S. government should make investments in these companies."
Along with 5G products, Cisco also has software and hardware ready for companies when they upgrade wireless networks to Wi-Fi 6 and shift workloads from the data center to cloud providers. Both trends, as well as the shift to 5G, are "multiyear transformations," Robbins said.
Overall product revenue, orders down
Overall, product revenue was down 6% to $8.7 billion, while product orders fell 6%. Within customer segments, orders were flat in the public sector and down 7% and 4% in the enterprise and commercial sectors, respectively.
Sales of infrastructure platforms were down 8%, due, in part, from lower revenues from campus and data center switching. The exceptions were Cisco's Catalyst 9000 and Nexus 9000 campus and data center switches, respectively. Sales of both grew in the quarter.
Sales of wireless technology also declined except for Wi-Fi 6 products and the Meraki portfolio. Both recorded increases.
Cisco reported an 8% decline in its application revenue, driven by lower sales in its unified communications portfolio. The company, however, said sales of the AppDynamics application performance management product grew in the "double digits."
Revenue from Cisco's security products grew 9% as a result of higher sales in the company's identity and access management tools and its unified threat management products.
Sales of software subscriptions grew to 72% of overall software sales, a percentage higher than the previous quarter. Cisco is aggressively pushing customers to buy multiyear subscriptions of its applications, a model favored by investors but not always by customers.