Cisco's Q1 Success Overshadowed By Bleak Q2 Outlook

Cisco beat Wall Street estimates for its fiscal year 2016 first-quarter earnings, but the positive news was overshadowed by less positive guidance for its upcoming quarter: For its second quarter, the networking leader is expecting to see revenue growth of only 0 percent to 2 percent, with earnings per share at just $0.53 to $0.55.

"Our Q2 guidance is below what the market had expected," said CEO Chuck Robbins during Cisco's earning call Thursday. "In Q1, we saw lower-than-expected order growth, driven ... largely by uncertainly from the macro environment and currency impacts, primarily outside the U.S."

The San Jose, Calif.-based networking giant beat analysts' estimated of $0.56 earnings per share and $12.65 billion in revenue for its first quarter, reporting a record $0.59 per share and sales of $12.7 billion. Despite the positive earnings, the second-quarter guidance sent Cisco stocks plummeting nearly 5 percent in after-hours trading.

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"If I look back at the last 90 days in my first quarter, I'm more optimistic than ever in Cisco's future," said Robbins. "Yes, the guidance we just gave for Q2 is lower than what the market expected, and I don't take that lightly, but for me, nothing has changed in how I feel about the business. We're moving incredibly fast and doing all the right things to drive our growth and strategic relevance. We expect the results of these moves will start showing up in the coming quarters. … Our portfolio has never been stronger, more relevant and more strategic."

Kent MacDonald, vice president of converged infrastructure and network services at Long View Systems, a Calgary, Alberta-based solution provider and Cisco Gold partner, said he wasn't concerned about the low second-quarter guidance.

"Based on what we're seeing in market transition, with the cloud being a new competitor, for Cisco to hold a very significant market presence -- and with all the new transitions going on inside Cisco -- I see a good future for Cisco," said MacDonald. "Having a good result in Chuck's first quarter is pretty commendable. After 20 years of [former CEO] John Chambers, for Robbins to not really miss a step with a new leadership team in place, a focus on technology and to have a growth target is a good thing."

The networking giant reported that switching revenues were up 5 percent year over year, to $4 billion, while its routing decreased 8 percent, to $1.8 billion.

"On the routing side, it's a timing issue," said Robbins. "We had good order growth -- our new platforms were up in triple digits from an order perspective. We do expect that to bounce back. We also have a new introduction coming out in the next week or so."

Cisco's data center switching portfolio, consisting of the Nexus 3000, Nexus 9000 and its ACI, is running at a $2 billion run rate, according to Cisco, with more than $500 million in revenue for the quarter -- representing more than 140 percent year-over-year growth.

"This performance is much stronger than our competitors, who claim they are outpacing and outperforming us," said Robbins.

A big push from Cisco this fiscal year will be security, which grew 7 percent from a year ago. Robbins is expecting double-digit growth in security in the coming quarters.

"The revenue grew 7 percent, but our deferred revenue grew 31 percent as they continue to transition the business to more software and subscription. The teams are pretty confident in the second half of the year that we can be back in the mid- to high teens from a revenue growth in security," said Robbins.

The company's data center business, which includes UCS, was up 24 percent compared with a year ago, to $859 million. Wireless was also up 7 percent year over year, to $645 million, particularly because of its Meraki business' growing more than 60 percent.

Cisco's services business was up 1 percent, at $2.8 billion, while enterprise sales were down 3 percent.

"We're conformable in the [enterprise] situation in the U.S.," said Robbins. "We did see weakness, particularly outside the U.S. … [But] our U.S. commercial business is up 12 percent."

Robbins said Cisco is driving internal innovation at a record pace. In fiscal year 2016, he said, Cisco is seeing a 25 percent increase in "major new product introductions."

"Stay tuned next week for an announcement for an additional product we co-developed with one of the world's largest Web-scaled players," said Robbins.

PUBLISHED NOV. 12, 2015