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Why Did Cisco’s Revenue Growth Slow Down in Q2?

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Cisco posts upbeat revenues

Cisco Systems (CSCO) posted revenues of $12.45 billion in the second quarter of fiscal 2019, which exceeded analysts’ expectations of $12.41 billion by 0.3% but lagged the company’s revenue expectations of $12.48 billion–$12.72 billion.

Cisco’s revenues increased by nearly 5% YoY in the third quarter. Cisco has been delivering YoY revenue growth for the past five quarters after declines for six straight quarters. However, the revenue growth slowed down in the current quarter probably due to the sluggish demand for its routers and switches, which was exacerbated by the US-China (MCHI) trade war concerns.

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Segment revenues

While product revenue was up 9% YoY in the quarter, service revenues grew 1% YoY in the quarter excluding the sale of Cisco’s SPVSS (service provider video software solutions) business in October 2018.

Product revenues were driven by growth in Applications, Security, and Infrastructure Platforms revenues, which also exceeded analysts’ expectations. The Infrastructure Platform segment, Cisco’s largest business segment, which includes data center switches and routers, posted revenue growth of 6% YoY to $7.13 billion. Applications revenue including AppDynamics and WebEx, grew 24% YoY to $1.47 billion. Security revenue of $658 million was up 18% YoY in the quarter driven by an improved IT security spending environment and an increase in software investments. The company’s recent acquisition of software and services firm AppDynamics also boosted the Security revenues.

Services revenue was driven by software and solutions support. The company is transforming its business and shifting focus to deliver more software and cybersecurity offerings as companies are increasingly shifting to cloud services offered by Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL), instead of developing their own networks. Amid the declining demand for its routers and switches, Cisco’s efforts to grow in the newer areas of cloud computing, Internet of Things (or IoT), and cybersecurity could further boost revenues.

Outlook

For the third quarter, Cisco expects revenues to grow in the range of 4% to 6%. Analysts expect revenue of $12.898 billion for the third quarter, which would be a 3.5% YoY increase, lower than the company’s expectations.

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