Cisco Slides After Mixed Numbers: 6 Key Takeaways

The networking giant slightly topped January quarter estimates, but also issued in-line guidance and reported a 6% product order decline.
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Software and product order declines are overshadowing Cisco Systems’  (CSCO) - Get Report slight quarterly beat.

On Wednesday afternoon, Cisco reported January quarter revenue of $12.01 billion (down 4% annually) and non-GAAP EPS of $0.77, topping consensus analyst estimates of $11.97 billion and $0.76.

The networking giant also guided for revenue to be down 1.5% to 3.5% annually during its April quarter, and for EPS to be in a range of $0.79 to $0.81. That's in-line with a consensus for revenue to drop 2.6% to $12.62 billion, and for EPS to come in at $0.80.

Separately, Cisco hiked its quarterly dividend by a penny to $0.36 per share. The forward yield stands at 3%.

Cisco shares fell 4.6% in after-hours trading to $47.65, leaving it 18% below a 52-week high of $58.26. Here are some notable takeaways from Cisco’s earnings report and call.

1. Enterprise and Carrier Orders Remained Under Pressure

On its earnings call, Cisco disclosed that its closely-watched product orders fell 6% annually last quarter, after dropping 4% in the October quarter.

Cisco saw broad-based product order declines last quarter. Source: Cisco.

Cisco saw broad-based product order declines last quarter. Source: Cisco.

While orders from public sector clients were flat, commercial orders (they involve small and mid-sized businesses) fell 4% and enterprise orders fell 7%. Service provider orders, which have been pressured for a while by soft telco capital spending and limited exposure to heavy-spending cloud giants, fell 11%.

Echoing comments made in November, CEO Chuck Robbins insisted buying pauses caused in part by macro uncertainty were weighing on demand. A number of other enterprise hardware firms have also reported seeing macro headwinds lately, but far fewer enterprise software firms have.

A couple of silver linings for service provider orders: Cisco has taken initial orders from cloud giants for the switching/routing processors that (in a strategy shift) it’s willing to sell on a standalone basis, and the company says it has more than 30 deals related to supporting initial 5G rollouts.

2. Applications Segment Revenue Fell Short

Cisco’s Applications segment, which covers many of its software businesses, saw product revenue drop 8% annually to $1.35 billion, missing a $1.43 billion consensus. Applications revenue had been up 6% in the October quarter.

CFO Kelly Kramer attributed most of the Applications decline to lower sales for unified communications (UC) offerings. These products, which include Cisco’s traditional Webex UC business as well as offerings obtained through the 2018 BroadSoft acquisition, were dealing with tough annual comparisons and continue facing tough competition from the likes of Zoom Video Communications  (ZM) - Get Report, RingCentral  (RNG) - Get Report, 8x8  (EGHT) - Get Report and Microsoft  (MSFT) - Get Report. UC weakness was partly offset by strong growth for the AppDynamics application performance monitoring (APM) business.

3. Hardware Sales Were Also Under Pressure

Cisco’s giant Infrastructure Platforms segment, which covers its core hardware franchises and related software sales, saw revenue drop 8% to $6.53 billion, following a 1% drop in the October quarter.

Campus (office) and data center switch sales both fell, in spite of strong double-digit growth for Cisco’s relatively new Catalyst 9000 campus switch line. Router sales remained pressured by weak carrier demand, and server and wireless (Wi-Fi) sales also fell.

4. Services and Security Were Bright Spots

While Cisco’s total product revenue fell 6% to $8.67 billion, its services revenue, which covers both standalone services and maintenance/support services for products, rose 5% to to $3.33 billion.

Security product revenue rose 9% to $748 million, topping consensus by $6 million. Robbins asserted that every Fortune 100 company is using one or more Cisco security offerings.

5. Stock Buybacks Rose Slightly

Following $768 million worth of buybacks in the October quarter, Cisco spent $870 million in the January quarter to repurchase about 18 million shares at an average price of $46.71. The company has $11.8 billion left on its buyback authorization, which of course can be expanded whenever it wishes.

6. Cisco Is Seeing DRAM Prices Move Higher Again

A comment that might be of interest to investors in DRAM makers (such as Micron  (MU) - Get Report) or their equipment suppliers: Kramer said that Cisco is seeing DRAM prices, which fell sharply in 2019 and boosted Cisco’s margins in the process, start to tick higher again.

The comments follow recent reports of DRAM spot prices moving higher, as major capital spending cuts by DRAM makers yield a more favorable supply/demand balance.