A downbeat outlook attributed to broad-based macro pressures is weighing on Cisco Systems' (CSCO) stock post-earnings.
On Wednesday afternoon, Cisco reported October quarter (fiscal first quarter) revenue of $13.16 billion and non-GAAP EPS of $0.84. Revenue was up 2% annually after accounting for the Oct. 2018 sale of Cisco's pay-TV software business, and beat a $13.08 billion consensus analyst estimate. EPS, which benefited from stock buybacks and a 1.7-point increase in Cisco's non-GAAP gross margin to 65.9%, topped an $0.81 consensus.
However, the networking giant also guided for its January quarter revenue to be down 3% to 5% annually, and for EPS to be in a range of $0.75 to $0.77. That's below consensus estimates for 2.4% revenue growth and EPS of $0.79.
As of the time of this article, Cisco's stock is down 5.1% in after-hours trading to $45.97. The drop comes three months after Cisco slumped due to a light October quarter outlook.
What's Weighing on Cisco's Sales
Cisco noted in its earnings release that it's seeing a "challenging macro environment," and CEO Chuck Robbins added on the earnings call that macro pressures that Cisco was previously seeing are now "more broad-based."
While service provider and emerging markets demand (also under pressure in the July quarter) were said to be particularly weak, Robbins noted Cisco's sales to enterprises and "commercial" (small and mid-sized business) clients were also now coming under pressure, with some enterprise deals either failing to close during the quarter or getting downsized.
Cisco's closely-watch product orders fell 4% annually, after being flat in the July quarter and up 4% in the April quarter. Orders fell across all three of Cisco's geographic regions, as well as 3 out of 4 of its customer segments (public sector orders were the exception, growing 6%).
Cisco's October quarter product orders. Source: Cisco.
Service provider orders, which have been hurt by soft telco spending, fell 13% after having dropped 21% in the July quarter (5G network rollouts could provide a lift starting next year). And total orders from the BRIC countries and Mexico fell 26%, with Chinese orders (already soft in the July quarter) dropping 31%.
With Cisco's router sales depending heavily on service providers, the company's routing revenue fell during the October quarter. On the other hand, switching sales (benefiting from an ongoing upgrade cycle related to Cisco's Catalyst 9000 switch line) rose, as did wireless (Wi-Fi) and data center (server/storage) sales.
Naturally, Cisco's light guidance sparked some earnings call questions about the competitive environment it's dealing with. However, Robbins insisted that Cisco's deal win rates didn't worsen, and also asserted that its sales pressures had nothing to do with technology shifts such as the adoption of white-box switches.
Plenty of other companies (both hardware vendors such as routing archrival Juniper Networks (JNPR) , as well as chip suppliers such as Texas Instruments (TXN) ) have signaled that telecom capex is soft right now. And as the downbeat revenue outlook shared on Wednesday by enterprise storage vendor NetApp (NTAP) drives home, Cisco isn't by any means the only major enterprise hardware firm to be talking about weak demand and macro pressures.
With that said, given the upbeat outlooks shared over the last month by many enterprise software and security firms, as well as the ongoing adoption of public cloud infrastructures by enterprises, it's fair to wonder if (in addition to macro headwinds) Cisco and other enterprise hardware firms are being stung by an ongoing shift in corporate IT spending towards software, security and cloud services relative to hardware and traditional IT services.
What's Still Performing Well
A look at the strong points within Cisco's earnings report drives home how the aforementioned shift in IT spending priorities is affecting the company, and also highlights why Cisco has invested aggressively (both via acquisitions and organic investments) during the Chuck Robbins era to grow its software and security exposure.
While Cisco's Infrastructure Platforms segment, which covers its core hardware franchises and related software, saw revenue drop 1% last quarter, the company's Applications reporting segment, which covers many of its software businesses, saw revenue grow 6% to $1.5 billion. On the call, CFO Kelly Kramer indicated that the Applications segment saw broad-based growth, and that the AppDynamics app performance monitoring (APM) software business once more saw double-digit growth.
Security segment revenue (it includes hardware, software and services) grew 22% to $815 million, easily beating a $723 million consensus and driving much of the quarter's revenue beat. Last year's Duo Security acquisition (it closed in Oct. 2018) provided a lift, but Kramer indicated many other security businesses also contributed to growth.
Applications revenue growth, and to some degree Infrastructure Platforms and Security growth, would have been stronger if not for Cisco's ongoing revenue mix shift towards software subscriptions relative to up-front license payments. Some 71% of Cisco's October quarter software revenue involved subscriptions, up from 70% in the July quarter and 59% in the year-ago quarter.
Software and services subscription growth helped Cisco's remaining performance obligation -- which covers all of the revenue that Cisco has either been paid for or is under contract, but hasn't yet been recognized -- rise 11% annually to $24.9 billion.