Cisco shares fall as CEO warns pandemic is still impacting enterprise sales

Vendor’s enterprise business falls by nine per cent in Q2 as Covid hinders recovery

Cisco's share price tumbled in after-hours trading on Tuesday after CEO Chuck Robbins told investors that the pandemic is continuing to impede the recovery of its enterprise business.

Revenues for its second quarter for the three months ending 23 January 2021 came in at the higher end of Cisco's guidance with flat growth year on year to $12bn, while GAAP operating income fell five per cent to $3.2bn.

EMEA was Cisco's highest growing segment during the quarter, with revenues up two per cent year on year to $3.2bn, while the Americas were down one per cent to $6.97bn and APJC fell four per cent to $1.78bn.

Cisco's total product revenues fell by one per cent while services grew by two per cent.

Although Cisco said that its revenues and profits came at the higher end of its guidance, investors were spooked by a sharp decline in Cisco's enterprise business during the quarter.

Cisco's share price fell by more than five per cent in after-hours trading to $45.87 as it revealed that its enterprise segment had struggled to regain ground as the pandemic continues to keep its clients away from offices.

Its enterprise revenues fell by nine per cent during the quarter, lagging behind its commercial, service provider and public sector segments which were up by one per cent, five per cent and 10 per cent respectively.

"The enterprise market remains soft, driven by some elongated sales cycles and a continued pause in spending among some customers brought on by the pandemic," Robbins said on an earnings call transcribed by Seeking Alpha.

Robbins focused on the positives during a call with investors, adding that customers in industries less affected by the pandemic such as financial services, manufacturing and technical services have shown some positive signs of recovery.

Products such as Catalyst 9K, data centre switching, security, wireless and WebEx were strong during the quarter, said Robbins, while Cisco logged $3.6bn in software revenues - 76 per cent of which were sold as a subscription.

Robbins also referenced trends from the 2008 financial crisis where growth in its commercial business was soon followed by enterprise.

"It's just been a really good sign that the US commercial business this past quarter grew 6 per cent from an orders perspective, which I think is a nice bounce. And obviously it was 1 per cent globally. But seeing that go positive gives us also confidence in the future of the enterprise following," he added.

Cisco is expecting its enterprise business to pick up once customers return to work and begin investing in office infrastructure, wireless networking and hybrid meeting rooms.

Robbins told investors that enterprise customers are likely to return to offices in mid to late summer, but recent developments suggest that New York firms won't be returning until September.

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The CEO has previously exuded optimism about Cisco's future despite the pandemic causing sharp declines in product revenues that particularly hurt its enterprise business.

In its previous quarter, for the three months ending 24 October, Robbins told investors that Cisco had a "robust pipeline" of new transactions from enterprise customers as they looked to upgrade their core infrastructure in anticipation of a return to the office.

But it looks link this pipeline of projects have disappeared yet again with customers continuing to put on-prem office investments on the backburner.

So long as the pandemic doesn't throw up any more surprises and customers continue to plan for a return to office this summer, then Cisco is surely banking on its Q3 to exhibit a strong recovery for its enterprise sector.

Indeed, Cisco's guidance expects revenues growth to be in the margin of 3.5 to 5.5 per cent for its next quarter - a significant improvement, although also an easy compare considering the same period last year falls under the months when the pandemic first hit.

It's interesting to note that Juniper Networks, one of Cisco's main competitors, has been performing much better in the enterprise segment than its larger rival.

For its Q4 ending 31 December, Juniper logged a record year for its enterprise business, which grew by seven per cent to $467m.