Cisco's teams were scrambling after the Trump administration increased tariffs to 25% on $200 billion worth of Chinese products on Friday, but CEO Chuck Robbins downplayed the impact of the latest round of tariffs on Wednesday's third quarter conference call.
“We see very minimal impact at this point based on all the great work the teams have done, and it is absolutely baked into our guide going forward,” Robbins said of the tariffs. "Operationally, all that we needed to do is now behind us, and we see very minimal impact at this point based on all the great work the teams have done and it is absolutely baked into our guide going forward."
Cisco CFO Kelly Kramer said on the earnings call that while Cisco still had some manufacturing in China, the company has "greatly reduced our exposure working with our supply chain and our suppliers."
Despite the trade dispute with China, Cisco is optimistic that there will be continued demand for its networking software and hardware. Cisco expects 4.5% to 6.5% revenue growth year over year in its fiscal fourth quarter, and non-GAAP earnings of 80 cents to 82 cents per share, which is in line with analyst projections of 81 cents per share. Cisco projected revenue of as much as $13.5 billion, compared with analysts’ average estimate of $13.3 billion.
Cisco's Infrastructure Platform segment, which includes networking software, routers and switches, accounted for $7.55 billion of Cisco's third quarter revenue, which exceeded FactSet's consensus estimate of $7.46 billion.
Here's a rundown of some of the other areas that Robbins spoke about during the call:
Lumpy service providers
In the third quarter, Cisco said enterprise revenue was up 9%, commercial revenue increased 5% and public sector revenue grew 10%. On the other hand, service provider revenue was down 13% in the quarter. Robbins said the capex spend by service providers was down 20% in the third quarter, and most of the negative impact on service provider revenues was in the Americas region.
"Look, we've always talked about this business as being highly lumpy and very customer driven," Robbins said. "And we've seen quarters where you see several big customers stall, and this is a result. And, most of the impact of what we saw was in the Americas."
Robbins added that service provider revenue will tend to be lumpy "from one quarter to the next until we get into a real network build out relative to 5G." He said Cisco's strength in the public sector and commercial and enterprise markets continues to suggest "the innovation that our teams have brought into the portfolio is still resonating with our customers."
Going across the geographies that Cisco serves, Americas was flat, EMEA was up 9% and APJC was up 6% thanks to service provider sales in Japan.
Software model is paying off
Cisco has been transforming itself from hardware-based revenues to a software subscription model ever since Robbins took over as CEO four years ago.
"If you go back two years ago, we didn't have a single networking product with a software subscription on it," Robbins said. "And today, every product in the enterprise routing space, enterprise Wi-Fi space and the enterprise campus switching space is sold with a mandatory subscription."
Kramer said software subscriptions were 65% of total software revenue, which was a nine-point increase year over year. Cisco didn't disclose the amount of reoccurring software revenue it made in the third quarter, but Robbins and Kramer said Cisco was on track or ahead of where it said it would be two years ago at a financial analyst conference.
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5G payoff: Not yet
Robbins said that while Cisco is helping telcos build out there core networks ahead of large-scale 5G rollouts, the capex "forecast doesn't look healthy for these guys."
"They're leveraging their existing core networks to run the early trials that they have on 5G, basically," Robbins said. "And, we believe that sometime in the future when the number of connections increases, and the capacity gets to a point then they're obviously going to begin to build out these new backbones dedicated to the 5G infrastructure, is where we will generally come into play.
"We're also obviously selling them packet core technology for the new 5G networks today, but the big play for us is when they begin to evolve their networks to accommodate the traffic. And, we've always said we felt like that would be sometime in calendar 2020."
For now, Robbins said Cisco is working with telcos on their architectural designs for 5G, but the big impact will be in core routing backbone technology once 5G is more widely deployed.
400G and hyperscale cloud providers
In response to an analyst's question, Robbins said that he does see the advent of 400G this year as a possible opportunity for Cisco to insert itself with the hyperscale cloud providers. After years of working with telcos and service providers, Robbins said architectural transition points are where Cisco would have opportunities with the cloud providers and that 400G represents an insertion point.
"But, to give you any timeline, I think we're just going to have to wait and keep plugging away," he said. "We've made a ton of progress on the relationship side. We've got a lot of deep technical discussions that are going on."
In January, Cisco announced that its Application Centric Infrastructure (ACI) technology has extended its reach into Amazon Web Services (AWS) and Microsoft Azure's public clouds.