While the networking giant saw product orders from enterprise, small- and mid-sized businesses, and public sector clients respectively rise 3%, 5% and 1% annually, orders from service provider clients fell 5%. In addition, soft demand from carriers led Cisco's router revenue to fall 6% to $1.9 billion; that was a big reason total product sales only rose 1% on an adjusted basis to $9.6 billion.
When asked about routing weakness on the earnings call, CFO Kelly Kramer suggested Cisco saw double-digit declines in service provider capital spending outside of the U.S., and "maybe flat to slightly up" spending in the U.S. She insisted network traffic growth, fueled by online video, would lead demand to eventually bounce, but added that "in uncertain times ... customers tend to sweat assets as long as they possibly can."
Cisco's report comes two weeks after Nokia (NOK) - Get Report, which recently merged with Alcatel-Lucent, reported its Networks division's sales fell 11% in the second quarter on a merger-adjusted basis, to €5.2 billion ($5.9 billion). Mobile infrastructure sales fell 12% to €3.8 billion, router sales fell 7% to €713 million, optical networking sales fell 8% to €375 million and apps/analytics sales 20% to €333 million. Fixed broadband infrastructure was the sole strong point, rising 7% to €622 million.
Nokia also reported Networks revenue fell in every geographic region, and forecast the division's revenue would decline in 2016. Among other things, it cites a declining mobile infrastructure market, a "flattish" broader capital expenditure environment and "competitive industry dynamics."
Rival Ericsson (ERIC) - Get Report, which struck a far-reaching partnership with Cisco last year, didn't fare any better. The company's Networks division sales fell 14% in the second quarter to $3.2 billion, and its Global Services revenue fell 7% to $2.9 billion. Ericsson blamed factors such as emerging markets macro weakness, lower European mobile capex and weaker Chinese 3G spending.
Juniper Networks (JNPR) - Get Report, Cisco's top carrier router rival, also has its share of issues. The company's sales were roughly flat in the second quarter, and are forecast to be flat again in the third quarter. Router sales fell 5% last quarter to $574.7 million, helping offset switching growth.
And optical networking firm Infinera (INFN) - Get Reportstunned markets last month by guiding for third-quarter sales to be down roughly 20% annually, a major reversal from the second quarter's 6% adjusted growth. On its earnings call, the company blamed "a softening demand environment from certain customers in North America and Europe," the completion of long-haul network buildouts and lower subsea network win rates.
A common problem faced by all of these companies: Many of their biggest telco clients are seeing little to no revenue growth. High smartphone penetration rates in developed markets, declining mobile voice and SMS revenue and landline phone disconnections are all weighing.
Giant international mobile carrier Vodafone (VOD) - Get Report saw revenue drop 4.5% in the second quarter to £13.4 billion ($17.6 billion); adjusted for M&A activity and forex, revenue was up a modest 2.2%. Telefonica (TEF) - Get Report, which has a large presence in both Europe and Latin America, saw revenue drop 7.7% to €12.7 billion ($14.4 billion) in the first half of 2016. Over in the U.S., AT&T's (T) - Get Report Business Solutions revenue fell fractionally to $17.6 billion, and its Consumer Mobility revenue fell 7% to $8.2 billion.
Other factors are also pressuring equipment suppliers. 4G networks are largely built out in developed markets, and the start of major 5G rollouts is still a few years away. And for router makers in particular, the adoption of more intelligent optical networking systems could gradually impact carrier router sales. Likewise, adoption of virtual (software-based) routers that can run on commodity hardware could eat into sales of routers with less demanding needs.
Also: China's Huawei and ZTE, while having little U.S. presence due to security fears, are proving fierce competitors overseas. They also have an outsized share of the Chinese market, which has been a relative bright spot for telecom capex. Huawei's first-half revenue rose 40% annually to $36.7 billion thanks to both smartphone and networking hardware demand. ZTE's revenue rose 23.8% last year to $15.2 billion.
Put it all together, and it's easy to see Cisco and many of its peers facing soft carrier demand for some time. The group's best bet for growing service provider sales may not be in convincing the likes of Vodafone and AT&T to buy more, but in growing sales to heavy-spending cloud service providers such as Amazon, Google and Facebook.
But as recent numbers show, offsetting weak spending from the former group by increasing sales to the latter is very much a work in progress.