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Why Does Cisco Expect Lower Revenues in Q2?

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Nov. 14 2019, Published 9:08 a.m. ET

Cisco Systems (CSCO) reported revenues of $13.2 billion in the first quarter of fiscal 2020, which translates to a 2% YoY (year-over-year) increase. The revenues beat analysts’ estimates of $13.08 billion by nearly 1%. The revenues were within the company’s expectations of $13.10 billion–$13.36 billion.

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What to expect from Cisco’s revenues

Cisco’s revenues have been rising over the past six quarters. On the flip side, there’s a drastic slowdown in the revenues in the current quarter compared to the previous quarter. In the fourth quarter, the company recorded a 6% YoY revenue growth, which fell to 2% YoY growth. The revenue growth slowdown in the first quarter was due to lower growth in eight out of the top ten countries in which Cisco sells. Also, during the earnings call for the first quarter of fiscal 2020, the company’s CEO said, “We saw things like conversion rates on our pipeline were lower than normal, which says that things didn’t close the way we would have historically seen it. We didn’t see any incremental loss ratios. It was really just stuff slipping. We saw some large deals get done but got done smaller.”

Revenues by segment

In the first quarter of fiscal 2020, Cisco’s product revenues increased by 1% YoY and its service revenues grew 4% YoY not considering Cisco’s SPVSS (service provider video software solutions) business. Product revenues account for 75% of the company’s total revenues.

The revenue increase from the applications and security segments led to moderate growth in Cisco’s product revenues for the first quarter of fiscal 2020. However, the infrastructure platform segment, Cisco’s largest contributor to product revenues, recorded a 1% YoY decline in revenues. The segment deals with the data center switches and routers business. Applications revenues, including AppDynamics and WebEx, improved 6% YoY to $1.49 billion and contributed to 15% of the product revenues. Similarly, the surge in software investments and a better IT security spending environment led to a 22% YoY rise in security revenues of $815 million.

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Software and solutions support continued to help Cisco achieve growth in services revenues for the first quarter of fiscal 2020. The company’s software subscriptions improved by 12 points YoY and accounted for 71% of its total software revenues. Notably, the company’s acquisitions had a positive impact by 50 basis points on its revenues. The company is clearly shifting its focus towards the software business due to the rising popularity of cloud services. Cisco is moving away from developing its own networks.

Revenues by geography

Based on geography, Cisco generated most of its revenues from the Americas. In the first quarter of fiscal 2020, the revenues from the Americas rose 4% YoY excluding the sale of the company’s SPVSS business. However, the revenues from APJC (Asia-Pacific, Japan, and China) fell 8% YoY mainly due to the US-China trade war. Meanwhile, the product orders from EMEA and the Americas fell 3%. The demand from APJC fell 5% for the quarter. The decline in orders pulled down the overall product orders by 4% for this period.

Declining revenue outlook

For the second quarter of fiscal 2020, Cisco expects its revenues to fall 3–5% YoY. The company plans to remain conservative with its outlook due to unpredictable macroeconomic conditions. Cisco’s forecast is short of analysts’ revenue expectations of $13.09 billion. The company’s gloomy outlook caused a 5% drop in the stock price during aftermarket hours on Wednesday. Also, the outlook impacted other companies’ aftermarket stock prices including Juniper (JNPR) and Arista Networks (ANET).

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