Cisco takes a coronavirus beating as profits fall

Cisco is not having a good pandemic.

While parts of the technology sector are still viewed as a relatively safe haven, the world's biggest maker of Internet switches and routers has just posted an 8% fall in revenues, to about $12 billion, and a 9% drop in net income, to roughly $2.8 billion, for the April-ending quarter (its fiscal third), compared with the year-earlier period.

Its performance will probably worsen, too. Cisco's forecast for the current, July-ending quarter is that sales will fall by approximately one tenth. If they do, it would be Cisco's biggest tumble in more than ten years.

None of it comes as a great surprise. In fact, parts of the analyst community had been expecting a far more disappointing set of figures. Michael Genovese, an analyst at MKM Partners, even described Cisco's performance as "impressive," and said the Californian company "blew away" his much lower estimates.

The problem, of course, is Cisco's heavy exposure to belt-tightening corporate customers and a hardware sector hammered by supply chain disruption. That could certainly have been worse, according to Genovese, but "manufacturing challenges and component constraints" were largely blamed by Kelly Kramer, Cisco's chief financial officer, for a 15% drop in infrastructure sales, to about $6.4 billion. Because that is Cisco's biggest division, accounting for more than half of total sales, the decline weighed heavily on the overall business.

"You have industries that are at the heart of this crisis who I wouldn't expect to make significant investments until we get to the other side," said CEO Chuck Robbins during a call with analysts, according to a Seeking Alpha transcript.

While not everyone is slashing investment, the public sector was the only sales growth segment for Cisco in the quarter, up 1%. Breakdowns of figures are unavailable, but the enterprise segment registered a 4% decline and Cisco's so-called "commercial" customers spent 11% less than a year earlier. Even service provider sales fell 3%, although Robbins called out mid-single-digit growth for this segment in the Americas due to capacity buildouts.

On 5G, he said, the picture is mixed. "I think you heard some of our customers that are looking for permits and with regional governments around the United States and other places that they are not sure they're going to be able to get that done during this pandemic," he said. "You've got other customers who are saying that they actually are not having a problem."

The good news was that sales of services remained fairly strong, with revenues up 5% year-on-year, to about $3.4 billion. Unfortunately, this business tilt away from products and hardware has not happened fast enough, and services still accounts for only 28% of total sales. Even here, moreover, there may be trouble ahead. "I would say that I expect pressure in my guide for Q4," said Kramer, pointing out that "discretionary" enterprise spending in areas such as consulting is likely to suffer.

Want to know more about 5G? Check out our dedicated 5G content channel here on Light Reading.

Worse than any pandemic-related pain would be signs that Cisco's rivals are taking advantage of its weakness to grab market share. Robbins seems confident this will not happen. "They've acknowledged it is going to be more difficult to do that during this time in areas where we have good market share." Elsewhere, he said, there was an opportunity for Cisco to win share with webscale customers and in the service provider space.

"I think that in the carrier space with 5G and the access networks, the backhaul networks, the core networks with the 8000 [a router product] and some of our other technology we've come out with, I think we can take share there as well," said Robbins.

There are some worrying indicators, though. In the UK, BT preferred Ericsson to Cisco when choosing a 5G core network provider. Cisco was also reported to be in the running for a fiber contract with BT, but that job has just gone to Adtran. Some European service providers seem just as worried about US snooping via Cisco as they are about Huawei as a conduit for Chinese spies.

Cisco has also just recorded its first year-on-year cut to R&D spending for 11 quarters, slashing its investments by 7%, to about $1.5 billion, for the April-ending quarter. As Huawei continues to shovel money into research, this sort of move will hardly buoy confidence in the US government's ability to restrain China's technological advance. Cost cuts may exacerbate concern regarding job losses, too, about which executives had nothing to say on the call. Cisco's workforce grew from 72,900 employees in 2017 to 75,900 last year, as operating expenses rose over that period. In the recent third quarter, they fell 7%, to $4.4 billion.

Genovese is neutral about the stock, which had lost about 13% of its value this year before today's market opening. "The macro outlook from here is very uncertain," he said in his research note. "There is no guarantee the worst of the crisis is behind Cisco."

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— Iain Morris, International Editor, Light Reading