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Cisco sees an end to string of quarterly revenue declines

Cisco is cautiously optimistic that revenues will improve following a 9% drop last quarter. Rising enterprise orders contributed to a positive forecast for the current quarter.

Updated on Nov. 13, 2020:

Cisco provided a cautiously upbeat forecast for the current quarter, indicating that it was clawing its way back to revenue growth.

On Thursday, Cisco projected that revenue would be between flat and down 2%, a significant improvement from the 9% drop the company reported for the quarter ended Oct. 24. The forecast beat the Wall Street analyst consensus, sending the company's stock up nearly 9% in extended trading.

The financial improvement expected in the current quarter was in stark contrast to the previous period, the fourth consecutive quarter of declining revenue. Revenue in the first quarter of the 2021 fiscal year fell to $11.9 billion, while net income declined 26%, to $2.2 billion. Earnings per share on a non-GAAP basis decreased 10%, to 76 cents a share.

The company's largest revenue driver, sales of infrastructure platforms, fell 16% to $6.3 billion. That category was most affected by the economic downturn caused by the COVID-19 pandemic, Cisco CFO Kelly Kramer said. Technology in the category includes servers, switching, routing, and data center and wireless software.

Despite the drop, Cisco CEO Chuck Robbins said orders from enterprises and small and midsize companies had improved significantly, which led to the brighter forecast. For example, sales from the latter, which Cisco calls its commercial customer segment, were down 8% in the first quarter versus 23% in the last quarter of the 2020 fiscal year.

Strengthening sales

Revenue from enterprises fell 8%, but rising orders contributed to Robbins' optimism for the current quarter and beyond. "I'm not too concerned about it, honestly," he said of enterprise sales.

Also, Robbins said he saw interest in Cisco's Silicon One networking chip among cloud providers and other operators of hyperscale data centers. Introduced last December, Silicon One is available in white-box gear favored by those companies, which had shunned Cisco's proprietary hardware.

"The [sales] pipeline looks very strong," Robbins said.

Many customers were adjusting to disruptions brought on by the pandemic, Robbins said. Sales to the public sector, including government, education and healthcare, rose 5%, as organizations bought more of Cisco's collaboration and security products.

Cisco CEO Chuck RobbinsChuck Robbins

Robbins said he also expected companies to spend more on high-definition video conferencing as employees return to the office. He added that he believed companies will likely have hybrid workplaces, with more people working from home permanently than before the pandemic.

"It's hard to say super-optimistic because the numbers still aren't where we want them to be," Robbins said. "[But] we feel like we have a little more visibility now."

Nevertheless, Cisco has not performed as well as its competitors Arista and Juniper Networks. The companies reported this month a quarter-to-quarter revenue increase of 12% and 5%, respectively. Cisco's revenues declined during the same time frame.

Robbins said Cisco fared worse because neither rival sells servers, which significantly contributed to Cisco's drop in enterprise revenue. The weak campus networking market also affected Cisco more because both competitors are relatively new campus software and hardware providers.

Future revenue drivers

A potential long-term contributor to Cisco revenue included the 5G wireless buildout under way by carriers worldwide. Robbins said he expects that market to take off in "earnest" in the middle of next year, assuming the pandemic or other global events do not derail 5G deployments.

Another potential revenue drive is networking and security software that Cisco plans to offer as a cloud service, Robbins said. For example, customers could expect Cisco to offer software-defined WAN, security and an internet gateway as a service, a combination that Robbins called "high value, very differentiated."

"Those are the kinds of things that we're working through right now. And you'll see those kinds of offers come out from us over the next three, six, nine, 12 months," Robbins said.

As part of its earnings report, Cisco announced that R. Scott Herren, former CFO of Autodesk, will replace retiring Cisco CFO Kramer on Dec. 18. Herren had been CFO of the maker of industrial design software since 2014.

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