Four things we learned from Cisco's Q1 results
We dive into the networking giant's latest numbers
Cisco's group revenues dropped by two per cent to $12.1bn (£9.1bn) in the three months leading up to 28 October, while operating income slipped by four per cent to $2.8bn. Revenues were slightly down across all Cisco's geographies, with EMEA declining by three per cent year over year to $2.91bn, the Americas down by one per cent to $7.35bn and APJC by one per cent to $1.88bn.
Despite everything going south on a year-on-year basis, Cisco's share price jumped by four per cent in the hours after its Q1 financials were announced. We sift through the numbers to find out why.
Cisco has changed how it reports on segment performance
Ever since current CEO Chuck Robbins took over two years ago, Cisco has been pursuing a transition from selling networking hardware to networking services sold in subscription bundles. On an earnings call transcribed by Seeking Alpha, CFO Kelly Kramer reiterated that 100 per cent of new switches sold by Cisco are sold with a subscription as the firm looks to transform more sales into recurring revenues.
From now on, Cisco's hardware revenues will not be divvied up into specific product categories when the firm reports its financials. The firm will no longer provide individual sales figures for switching, NGN routing, datacentre or wireless products, for example.
This means Cisco's hardware sales - which, according to its Q1 results, represented 57 per cent of revenues ($6.97bn) - will be lumped under the category "Infrastructure Platforms", with other segments now reported as "Applications", which comprises Cisco's unified communications and IoT portfolio, followed by "Security".
Cisco claims that its new reporting method "better aligns our product categories with our evolving business model", but TechMarketView analyst Martin Courtney thinks Cisco is trying to "direct attention away from its declining legacy hardware business and towards the high-growth areas of Cisco's portfolio".
Either way, Cisco's new method of divvying up its business gives further fuel to its mission of diversifying its product portfolio and becoming better acquainted with emerging tech such as cloud and IoT.
Higher component costs will continue to drag on margins in Q2
Cisco has lowered its gross margin guidance for its next quarter as higher component costs continue to affect gross margins. All of the industry's stalwarts have been hit by the rising cost of memory components, including Dell, HP and Lenovo. Cisco has been battling against rising prices all year, but, on an earnings call, CFO Kramer said that it has lowered its gross margin guidance for Q2 by 0.5 per cent as component prices show no signs of lowering.
"The vast majority of the impact on our gross margin is driven by memory. It is basically 1.3 points of my product gross margin decline year over year. Everything else in our gross margin is basically in the normal ranges. So we expect that to continue. When you look at the guidance, we did bring it down 0.5 points to account for that because we are still seeing increases as we look forward," she said.
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Four things we learned from Cisco's Q1 results
We dive into the networking giant's latest numbers
Non-hardware segments continue to show promise
Despite its Infrastructure Platforms sales dipping by four per cent to $6.97bn during its first fiscal quarter, Applications and Security spending continues to show promise, rising six per cent to $1.2bn and eight per cent to $585m respectively.
Cisco claims that its acquisition of AppDynamics for $3.7bn at the start of the year drove forward its Applications segment. Meanwhile, advance threat, unified threat and web security solutions have all seen double-digit growth, according to Kramer.
Additionally, Robbins claims that under his stewardship, product revenues stemming from recurring offers have almost doubled from six per cent of revenues to 12 per cent today.
Cisco is hoping its intent-based network launch will stamp out Huawei
The networking giant launched its "intent-based" networking solutions, including its network management centre called the DNA centre, a new series of IoT-ready Catalyst switches and a fresh security offering in June this year. Robbins claims this will help Cisco contend with the lower upfront pricing offered by competitors such as Huawei. When asked by an analyst on its Q1 earnings call how Cisco is positioned against enterprise switching rival Huawei, Robbins claimed that its intent-based networking launch "really changes the discussion".
"Where we compete with competitors [whose] value proposition is upfront cost of the hardware, I think we're changing the discussion. Because if you look at the cost of operating this infrastructure over a five-year period, it's probably 10 times the cost of the upfront hardware. So helping our customers reduce that is a value proposition that helps us change the discussion relative to the competition. So [Huawei] continues to be very tough, but we think that competing on the price of the box upfront is something that we can shift over the next couple of years."