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Cisco’s journey hits a bump in the road with weak outlook and more redundancies

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US networking giant Cisco announced it is adding 1,100 further job losses and forecast a 5% revenue decline for the coming quarter.

While Cisco insisted the short-term dip is at least partly due to the long-term transition the company is undergoing to derive more of its revenue from software and services (join the club), the markets were unable to forgive the weak outlook and had punished the stock to the tune of -8% at time of writing.

Revenues and earnings per share were more or less in line with analyst expectations in what Cisco insisted was a solid quarter. But the weak outlook seems to have prompted the addition of 1,100 redundancies to the 5,500 announced last year, which will incur an additional $150 million of pretax charges ($136k per head!).

We’re on a journey which as we consistently stated, will take a number of years, but we’re pleased with the progress we’re making,” said Cisco CEO Chuck Robbins on the analyst call. “As our customers add billions of new connections in the years ahead, the network will become more critical than ever.

“They will be looking for intelligent networks that deliver automation, security and analytics that help them derive meaningful business value from these connections. These will be delivered through a combination of new platforms as well as software and subscription-based services which we’ve been focused on accelerating over the last 18 months.”

Robbins was keen to bring attention to all the strategic acquisitions Cisco had made recently and how they’re all part of the grand plan. He also made it clear there will be more. “We will continue to deploy our capital resources to give us first-mover advantage as we extend our technology portfolio,” said Robbins.

When asked about the weak guidance, Robbins placed much of the blame at the feet of the US public sector and US service providers. “The Public Sector business, particularly in the United States, the federal business is, frankly, it’s about 1 point of that guide. It’s a pretty significant stall right now with the lack of budget visibility.” Presumably this is mainly due to the uncertainty surrounding the Trump presidency.

“Our entire SP business around the world is driven by very large customers,” said Robbins. “And so when some number of them have an off quarter, it can affect the business. And I think the Americas would be probably an example of that this quarter as well. And the Mexico business that I discussed is heavily influenced by service providers. And so that’s a bit of what we’ve seen.” Both AT&T and Verizon had tough quarters and Brexit doesn’t seem to have helped the UK numbers.

“We set out 18 months ago to transition the business to one of more software and subscription,” concluded Robins. “At the time, 8 quarters ago, it was $2 billion on our balance sheet. Today, we’ve more than doubled that, up 57% this quarter to $4.4 billion and accelerating. So I believe that is working and we’ll continue to shift more and more of our offers into that space.

“Our customers really are going to be adding billions of connections in the future and they are going to need a next-generation network with security automation and analytics. And so we’re transitioning the business model. We’re transitioning the network offers that we’re going to deliver to our customers as they move into this next generation.”

In common with other transitioning networking giants like Ericsson and Nokia, Robbins is asking his shareholders for patience as the process plays out. The resulting dip in Cisco’s share price show the delicate balancing act public companies face, but it’s hard to question the necessity of this strategy. What remains to be seen is how effective it is. Here are some slides showing where Cisco’s revenues come from.

Cisco Q1 2017 revenue

 

Cisco Q1 2017 orders

 

Cisco Q1 2017 regions


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