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Cisco faces sales slump amid Chinese tariffs, falling SP revenues

Cisco forecast weak revenue growth in the current quarter, as service provider sales fell and product orders were flat. The company also reported being shut out of China.

Cisco has forecast weaker revenue growth than expected by investors, as the company struggles to increase sales to service providers and its business in China dwindles due to the U.S. trade war with the country.

On Wednesday, Cisco forecast revenue in the current quarter from flat to 2% and earnings per share from 80 cents to 82 cents for the first fiscal quarter of 2020, which was below the 2.5% and 83 cents Wall Street analysts expected, according to a poll by FactSet Research Systems Inc. Cisco stock fell 7% in after-hours trading following the forecast.

"The biggest driver of the guide … is the massive decline we've seen in service provider [sales] over the last two quarters," Cisco Chief Financial Officer Kelly Kramer told analysts during a conference call.

In the fourth fiscal quarter ended July 27, service provider orders fell by 21% from a year ago after dropping 13% in the previous quarter. Product orders, in general, were flat.

Cisco's service provider business is unlikely to improve unless the company provides more competitive technology to help carriers rearchitect their networks for 5G, the next-generation wireless technology, Glenn O'Donnell, an analyst at Forrester Research, said. Currently, Nokia, Ericsson and Huawei are the most significant 5G providers.

Without a viable 5G position, service providers will continue to not view Cisco as a strategic partner.
Glenn O'DonnellAnalyst, Forrester Research

"Without a viable 5G position, service providers will continue to not view Cisco as a strategic partner," O'Donnell said.

Cisco shut out of China

Also contributing to the disappointing Cisco forecast was the company's declining business in China due to the ongoing trade war. However, less than 3% of Cisco's total revenue comes from China, so the impact is manageable, Cisco CEO Chuck Robbins said.

"The overall Chinese market -- as I said earlier -- is certainly not a major play for us, but it has just dropped precipitously in light of the trade discussions," Robbins said.

Cisco had sold network infrastructure to the largest carriers in China for years, but that business has been slowly declining and then fell "rapidly" last quarter, Robbins said. Also, when it comes to competing for state-run enterprises, "we're being uninvited to bid."

"We're not being allowed to even participate anymore," Robbins said.

Cisco revenue grows in the previous quarter

For the fourth fiscal quarter, Cisco reported that revenue grew 6% from a year ago to $13.4 billion, while non-GAAP earnings per share rose 19% to 83 cents. Analysts had forecast revenue growth of 4% and a non-GAAP EPS of 81 cents.

Cisco reported product revenue growth of 14% in security, 11% in applications, which includes the company's unified communications and collaboration portfolio, and 6% in infrastructure platforms, which covers switching and routing. Infrastructure platforms sales reached $7.9 billion, or almost 80% of total product revenue, followed by applications, $1.5 billion, and security, $714 million.

Despite the strong performance in the quarter, Robbins said the company did not close the quarter in July "as strong as we would have liked."

"It just didn't feel like a normal Q4 finish, and it felt a little bit like some of the macro issues may be manifesting themselves," Robbins said.

Robbins did not list the adverse macroeconomic conditions, but one is likely U.S. President Donald Trump's decision to increase tariffs on some Chinese goods, which has contributed to the downward trend of the stock market.

Also, the global economy is showing signs of weakness. On Wednesday, the Dow Jones Industrial Average fell 800 points due to the growing possibility of a worldwide recession and weak economic data from China and Germany.

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