Hardware headwinds hurt Cisco as revenue dips two per cent in Q1

Sales down, orders up, hopes pinned on intent-based networking (A.K.A. a dash of AI)

Cisco suffered a decline in revenue for Q1 2018, weighed down by ongoing weakness in its switch and router business.

The company reported first quarter 2018 revenue of US$12.1 billion, which was two per cent down on the first quarter 2017. Total product revenue of $9.05 was down three per cent year-on-year, while services grew one per cent to $3.08 billion.

A recent reorganisation of Cisco's reporting structure means switches and routers are now a single reporting line called "Infrastructure Platforms"; the others are "Applications", "Security", the snappily-named "Other Products", and "Services".

Here's how each fared:

Category $M Change from Q1 2017
Infrastructure platforms $6,970 (4%)
Applications $1,203 6%
Security $585 8%
Other Products $296 (16%)
Services $3,082 1%
Total $12,136 (2%)

CEO Chuck Robbins said the company hoped to revive the limp switch-and-router business by injecting the products with intent-based networking, a technology that automatically tunes networks so they perform as close to desired baselines as is possible.

He also reported some easy wins in networking hardware, as "customers continue to shift to 10 gig, 40 gig and 100 gig architectures and embrace multi-cloud adoption."

Robbins was bullish about Cisco's security business, lauded its eight per cent revenue growth and pointed out that 42 per cent growth in deferred revenue suggests a rosy future.

The CEO also talked up the acquisition of Broadsoft, which he said should put a rocket under Cisco's software business.

"BroadSoft has 19 million subscribers in the growing cloud voice and contact center space and will enable Cisco to offer an even broader portfolio of Collaboration solutions to our customers, on-premise and in the cloud," Robbins told investors and analysts. "We expect this acquisition to accelerate the pace of innovation in our Collaboration business and we see many opportunities to extend the reach of the BroadSoft portfolio."

Cisco's Collaboration business needs the boost: Robbins said it was "up modestly".

All of Cisco's regions declined, with Europe, the Middle East and Africa down three per cent; Americas and the Asia Pacific were both down one per cent. However, Robbins said, orders in all geographies grew during the quarter, which bodes well for the future.

Recurring revenues have become a bigger part of Switchzilla's revenue mix, growing to 32 per cent of the total business, and subscriptions, at 52 per cent, are more than half the total software business.

Sales to enterprise customers shrunk five per cent. Robbins said such customers have the longest decision-making cycles. Enterprises “take the longest amount of time to evaluate new technologies,” Robbins said, whereas the smaller businesses in the commercial segment “grew double digits in every geography”, driving a 12 per cent growth in that segment.

Sales to service providers dropped six per cent, but the government segment finally showed signs of life, growing three per cent in the quarter. That growth came thanks to money finally flowing from Uncle Sam, despite many US government agencies having vacancies at the top. “Two quarters ago we talked about the pressure in the federal business; in the last quarter it was improving; and by year-end it seemed fairly normal," Robbins said.

That may or may not last, Robbins warned, since in December lawmakers will once again wrangle over America's debt ceiling.

With fingers crossed, Cisco provided guidance of a return to year-on-year revenue growth (two per cent) for Q2, the first time it's achieved that since 2015. ?


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