Cisco Systems said it faced macroeconomic pressure during its latest quarter but it’s confident that the impact will lighten as Cisco leans on its software-first business model. Even so, the vendor expects sales in its fiscal second quarter to decline by 3 to 5 percent from the same period a year before.
Cisco's Q1 2020 software subscriptions now account for 71 percent of its total software revenue, a figure that is up 12 points year over year. Cisco over the past year has refreshed its entire switching, routing, and wireless portfolio, which now is entirely sold through a subscription model, an effort that is "going exactly as planned," CEO Chuck Robbins said during Cisco's quarterly earnings call on Wednesday afternoon.
"One of the big things we want to do is continue the transition toward the software model. We had 30 years of a net 30 CapEx model, so we are in the midst of that transition and are making progress on a timeline we expected — that's the biggest strategic thing I think that we can do," Robbins said.
From a portfolio perspective, the tech giant wants to help its partners and customers capitalise on cloud, automation, 5G, security and collaboration, he added. "Clearly, we have a lot of customers that are still buying a lot of stuff, so while there is a slowdown, there's still meaningful value our customers are seeing with our technology."
Cisco's Robbins said that the company delivered solid performance despite a “challenging” macro environment, citing the US-China trade war as one issue. For the company's first quarter of 2020 that ended on 31 October, 2019, Cisco's revenue rose 2 percent to US$13.16 billion from US$13.07 billion in the year-ago quarter, with products accounting for US$9.88 billion and services at US$3.28 billion.
Cisco's Infrastructure segment, which includes the core switching and routing businesses as well as wireless and data center products, decreased by 1 percent during the quarter to US$7.54 billion. Despite the slight decline, every business within the Infrastructure segment was up except routing, which was down due to weakness in the service provider business, said Kelly Kramer, Cisco's executive vice president and CFO.
Robbins during the company's last earnings call in August said that Cisco had started to see early indications of macro impact, which kicked in during the company's first quarter of 2020. Specifically, the service provider segment dropped 13 percent during the quarter. Cisco’s revenue in China was down 31 percent during the quarter, Kramer said.
"[The macro impact at the end of Q4 2019] we saw basically continued. The entire quarter was worse than we expected when we began,” Robbins said, citing softness across several technology areas and segments, including enterprise commercial and service provider and emerging markets. "We have effectively assumed that it will stay as is … we haven't modeled any further deterioration or improvement."
While service providers are currently focused on building out consumer based 5G services, Cisco believes the service provider segment will improve when the carriers turn to Cisco for help building out their 5G enterprise networks that will require higher throughput for more traffic, which will likely happen by the end of 2021, Robbins said.
The firm’s security segment continued to be a bright spot, posting double-digit growth during the first quarter of 2020. The Security business, which Robbins said is resonating with customers right now, rose 22 percent in the quarter to US$815 million.
"Security is at the heart of everything we do. It's deeply integrated into the fabric of our portfolio," he said. "As the leader in zero-trust, our customers are increasingly turning to us to extend simple, and trusted access to their users in hybrid and multi-cloud environments. This is leading to a strong uptick in Duo, our identity access management solution."
The company's Applications business segment, which includes AppDynamics and the company's video conferencing and collaboration portfolio, rose 6 percent to US$1.50 billion in revenue in Q1. Robbins told CRN USA last week that Cisco is investing heavily in AppDynamics and that AIops and APM represents a big opportunity for partners.
Cisco last week at its 2019 Partner Summit said that its partner route to market is at more than 85 percent and it's never been this high in the company's history.
Cisco's net income rose 5 percent to US$3.61 billion during Q1 2020, up from US$3.45 billion year-over-year.
During the quarter, Cisco closed its acquisition of CloudCherry, a privately held Customer Experience Management (CEM) company that will give Cisco's contact center portfolio a boost, the company said.
Cisco stock declined by 5 percent in after-hours trading on Wednesday to US$46.03.