Cisco Profit, Sales See Big Drop In Q2

As it warned it would, Cisco Wednesday reported a steep drop in both its second quarter profit and sales, citing continued weakness in emerging markets and its service provider business.

For its second fiscal quarter, ended Jan. 25, Cisco reported revenue of $11.2 billion, down 7.8 percent from the $12.1 billion it reported in the year-ago quarter. The San Jose, Calif.-based networking giant managed to slightly beat analysts' expectations of $11 billion in sales, according to data from Bloomberg.

Cisco's net income for the quarter was $1.4 billion, down 54 percent from the $3.1 billion it reported during the same period last year.

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The decline, though significant, wasn't unexpected. Cisco in November warned that its second quarter revenue would likely slide between 8 percent and 10 percent, dragged down by weakness in emerging markets and its service provider business. Meanwhile, the company in December slashed its long-term growth outlook for the next three to five years from 5 percent to 7 percent down to 3 percent to 6 percent, attributing the drop to those same segments of its business.

"The market and the dynamics played out largely as we described in our last quarterly conference call," said Cisco CEO John Chambers on a conference call with analysts Wednesday. "We saw the impacts of emerging markets, service provider and high-end product transitions on our business as we discussed last quarter."

In the second quarter, Chambers said product orders for emerging markets were down 3 percent year-over-year, an improvement compared to the 12 percent year-over-year decline Cisco saw in the previous quarter. Chambers attributed Cisco's struggles in emerging markets like China to broader macroeconomic and political issues, and said last quarter that NSA spying concerns are likely impacting customer buying habits.

"While we saw some improvement quarter on quarter, emerging markets remain challenged as we discussed in the last conference call," Chambers said. "While this economic trend remains out of our control, we have put in place important programs and efforts designed to capture growth and position Cisco to capture share even if these markets remain challenged."

Cisco said orders within its service provider business were down 12 percent year-over-year, as service provider customers continue to ramp up with next-generation Cisco platforms like NCS.

By product segments, Cisco said its NGN Routing business was down 11 percent year-over-year, while Switching was down 12 percent and Collaboration was down 7 percent.

Bright spots for the quarter were Cisco's Data Center business -- including its Unified Computing System (UCS) converged infrastructure offering -- which was up 10 percent year-over-year. Cisco's Security business, bulked up by its $2.7 billion acquisition of cybersecurity specialist Sourcefire last year, was up 17 percent year-over-year.

Cisco's Wireless business, as a whole, fell 4 percent, but its cloud-based Meraki platform grew 100 percent year-over-year, with Meraki customers more than doubling from 4,300 to 9,600 in the second quarter alone. Chambers said this growth was largely due to the "power of the Cisco channel."

Cisco said product orders in its U.S. enterprise business were up 13 percent year-over-year.

Looking ahead, Cisco said it expects its third-quarter revenue to decline between 6 percent and 8 percent. Chambers, however, stressed the major opportunities for growth he sees in both the emerging Internet of Everything and Cisco's recently launched InterCloud platform for hybrid cloud environments.

"We plan to continue to disrupt the market and disrupt ourselves," he said.

PUBLISHED FEB. 12, 2014