Cisco Hit by Decline In Core Business -- WSJ
February 16 2017 - 3:02AM
Dow Jones News
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 again 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. Shares of Cisco rose 1.9% in after-hours trading on
Wednesday. The shares are up roughly 9% this year.
In the second quarter, Cisco's profit fell 25% to $2.35 billion,
weighed down by a $500 million tax charge as the result of an audit
by the Internal Revenue Service.. 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 02:47 ET (07:47 GMT)
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