Cisco predicts tough quarter ahead as revenue falls again

Networking giant expects revenues to continue to decline next quarter by as much as 3.5 per cent

Cisco CEO has told investors that he remains confident about the networking vendor's future, despite reporting another quarter of declining revenues amid ongoing macroeconomic pressures.

Revenues dipped by four per cent year on year during the three months ending 25 January to $12bn. GAAP operating income meanwhile grew by five per cent to $3.4bn, representing an operating margin of 28.2 per cent.

It represents the second consecutive quarter of revenue declines for the US networking giant, and will be the third quarter in a row in which it has given negative guidance for the quarter ahead.

Cisco expects revenues to decline by 1.5 to 3.5 per cent in its upcoming Q3.

The firm's share price dropped by four per cent in after-hours trading following the quarterly results.

Cisco CEO Chuck Robbins told investors that macroeconomic pressures such as Brexit and the US-China trade dispute has led to continued sales declines in the UK and China due to a slowdown in orders as customers hold off decision making.

The coronavirus outbreak has meanwhile caused Cisco to cancel its Cisco Live event in Australia and pull out of Mobile World Congress in Barcelona before the event was cancelled outright by organisers.

Robbins did not go into detail about how the outbreak will affect Cisco's business. CFO Kelly Kramer said that Cisco's guidance does not factor in potential supply chain issues caused by the coronavirus.

But the CEO came across markedly upbeat despite the plethora of global issues that could threat Cisco's business.

"What we're seeing from customers is really just them pausing to try and see what's going on," Robbins said.

"Now what I'll say is that clearly late in the quarter, if you look at some of the issues that had been outstanding that were creating some of the uncertainty like Brexit, we got closer to resolution. We obviously got a signature late in the quarter on a first phase of the US-China trade deal and USMCA (the United States-Mexico-Canada agreement) has now gone through in the US, so hopefully those will give our customers a little more viability," he said.

"When I speak to the customers, they're still fully planning on moving forward. They're just a little cautious and trying to see what's going on. We obviously have the virus now, and we'll see how it plays out. But overall, I don't think it's deep. And we expect that given some of this uncertainty has now dissipated, notwithstanding what we see obviously from the virus that hopefully, we'll see our customers pick up again."

Product orders were down by six per cent year on year, claims Cisco, with its Americas business down eight per cent, EMEA down one per cent and APJC down by four per cent. Its emerging markets saw a seven per drop in orders, while BRIC (Brazil, Russia, India, China) suffered a 20 per cent decline.

Kramer said that Cisco's European business would have grown orders by two per cent if it weren't for the UK, which has seen a slowdown, especially in the public sector, as a result of Brexit.

From a revenue standpoint, EMEA dropped by three per cent, the Americas fells by five per cent and APJC dipped by one per cent.

In general, product revenues decreased by six per cent to $8.67bn while services grew by five per cent to $3.33bn. Its Infrastructure Platforms and Applications revenues were both down by eight per cent.

Despite revenues declining across multiple business units, Robbins said Cisco is showing promising progress in shifting more business to a subscription-based model. He said 72 per cent of Cisco software is now being sold as a subscription, adding that its Catalyst 9000 range is continuing to perform after its launch in 2017 in driving its subscription-based portfolio.