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Cisco earnings show service providers are not buying

The latest Cisco earnings show a drop in overall revenue, as service providers spend less. Cisco blames lower sales on macroeconomics.

Cisco's core networking business struggled over the last three months against competitors and economic uncertainties that made customers skittish.

The latest Cisco earnings, released Wednesday, showed overall revenue for the first fiscal quarter ended Oct. 29 fell 2.6% year over year to $12.35 billion, while net income dropped 4.4% to $2.32 billion. The profit decline was mainly due to restructuring charges from 5,500 layoffs, announced in August, which are occurring in stages over the fiscal year.

Sales of switches, Cisco's largest business, dropped 7%. Other product categories that suffered declines in the Cisco earnings report included collaboration, 3%; data center, 3%; and wireless, 2%. "We saw a fair number of customers around the world that just put the brakes on [spending]," Cisco CEO Chuck Robbins told analysts during a teleconference.

A major contributor to revenue troubles listed in the Cisco earnings report is sales to web companies and network operators. Orders from the so-called service providers, which account for roughly a quarter of Cisco's business, fell 12%, Robbins said.

Why service providers aren't buying

We saw a fair number of customers around the world that just put the brakes on [spending].
Chuck RobbinsCEO, Cisco

Service providers were not spending because of uncertainties in world markets that have kept them on the sidelines, Robbins said. Adding to the concerns were possible regulatory changes due to political shifts in the U.S. and other parts of the world.

Another contributing factor could be service providers' preference for open technology over Cisco's proprietary hardware, analysts said. For several years, carriers, internet companies and large financial institutions have been building networks using open software running on commodity hardware manufactured by companies such as Quanta Computer Inc.

The shift has led to startups winning deals from service providers. "In the networking space, it [Cisco] is facing some stiff competition from some smaller players, especially in the software space," said Glenn O'Donnell, an analyst at Forrester Research.

Cisco earnings results not all bad

Cisco reported progress in its strategy to eventually make software and cloud-based services the largest portion of its overall revenue. Customer spending on software and subscription-based services drove deferred product revenue up 19%, the company reported. Also, revenue from routers and security software and services rose by 6% and 11%, respectively.

Another bright spot was Cisco's software-defined networking platform, Application Centric Infrastructure (ACI). Revenue from the data center software and related products grew 33%. Total sales for the fiscal year were on track to reach $3 billion, the company said.

Robbins is banking on security and ACI, which adds more automation to network management, to convince customers to upgrade their older hardware and software.

"As we continue to work on bringing automation and security and cloud-based [network] management to the rest of the portfolio, I think that will help our customers see the opportunity to refresh," Robbins said.

Meanwhile, Cisco expects its revenue slump to continue. In the current fiscal year, Cisco expected overall revenue to fall between 2% and 4%. The company expected an adjusted profit of 55 cents to 57 cents a share, which was less than analyst projections of 59 cents a share. Cisco shares fell more than 4% in after-hours trading.

"The predominant reason for the guide down is the service provider space," Robbins said.

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