CSCO Cisco Systems Inc

By Rachael King 

Even as Cisco Systems Inc. makes gains in new strategic areas such as security, the company continues to battle weak customer spending in its core business of networking gear.

The Silicon Valley company said Wednesday its second-quarter revenue fell 2.9% to $11.58 billion, due partly to weak spending among some customers on routing and switching systems that help move traffic over the internet and within data centers.

Cisco has now posted revenue declines for five consecutive quarters, and it said revenue could decline by as much as 2% in the current period. Cisco's results are closely watched for shifts in technology spending patterns ahead of peers. Chief Executive Chuck Robbins said some customers hesitated spending abroad but that the U.S. market is strong. "Europe is stressed with geopolitical dynamics across several countries, " he said on a call with analysts.

Mr. Robbins, who became CEO in 2015, is trying to chart a future in faster-growing areas like security and collaboration software, as the company's main hardware business has faced pressure from a host of competitors. Revenue from security jumped 14% in the quarter, while collaboration revenue climbed 4%.

To bolster its software offerings, Cisco said in January it would pay $3.7 billion for AppDynamics Inc. just as the startup was planning to hold an initial public offering.

Customers such as airlines, banks and even Cisco use AppDynamics's software to monitor the performance of their applications. That deal is expected to close during the current quarter.

But growth in these newer areas isn't outpacing the declines in Cisco's legacy businesses. In routers, the hardware that first made Cisco's name in the late 1980s, revenue dropped 10%.

Revenue from Cisco's largest segment, switching systems, fell 5%.

In recent years, its market share has slipped as large customers turn to competitors such as Arista Networks Inc. or to inexpensive commodity-style switching systems from vendors like Taiwan's Quanta Computer Inc.

Cisco held 57% of the $6.29 billion switching market for the three months ending in September 2016, down from 61.5% a year earlier, according to the most recent data available from market watcher International Data Corp.

In particular, the highest-growth segment in the switching market is the nearly $8 billion that cloud providers and telecom service providers spend annually on network switching gear, said Rohit Mehra, an analyst who leads IDC's networking practice.

In many cases, larger cloud providers and telecom service providers are looking for hardware that can be easily customized, automated and managed remotely, Mr. Mehra said.

"This is where Cisco is having challenges competing," he said.

Cisco is working at innovating in its switching and routing products, Mr. Robbins said. The AppDynamics acquisition is expected to help drive the analytics and automation that large internet customers expect from their data-center hardware, he said in an interview.

In the second quarter, Cisco's profit fell 25% to $2.35 billion, due partly to exceptional gains in the same quarter in the previous year. For example, the company had a one-time tax gain of around $500 million in the year-earlier period, largely driven by a settlement with the Internal Revenue Service of previous audits.

Excluding charges, adjusted earnings per share were 57 cents, compared with an analysts' consensus estimate of 56 cents a share, according to a Thomson Reuters poll of analysts.

For the latest period, Cisco expects revenue to be flat to down 2% from a year earlier. It forecast per-share adjusted earnings of 57 cents to 59 cents, in line with analyst estimates.

Cisco also said it boosted its quarterly dividend 12% to 29 cents a share. Cisco, which began issuing a dividend in 2011, has built up a large war chest of cash and investments that totaled $71.8 billion at quarter end.

Write to Rachael King at rachael.king@wsj.com

(END) Dow Jones Newswires

February 16, 2017 23:32 ET (04:32 GMT)

Cisco Systems (NASDAQ:CSCO)
Historical Stock Chart
From Mar 2024 to Apr 2024

Cisco Systems (NASDAQ:CSCO)
Historical Stock Chart
From Apr 2023 to Apr 2024