Cisco lowers fiscal Q2 forecast as service provider revenue dips 12%

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Cisco saw continued revenue challenges in its fiscal first quarter 2017 results as more of its service providers migrate away from hardware- to software-based platforms via SDN and NFV.

While Cisco is following the demand trend by bolstering its product portfolio with more software capabilities, the vendor continues to see near-term pain as the service provider segment declined 12 percent.

Due to the service provider results, Cisco lowered its second quarter guidance. The vendor now expects its fiscal second quarter revenues to decline by 2-4 percent.

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Chuck Robbins, CEO of Cisco, told investors that it expects to weather a challenging storm in the service provider market.

“The predominant reason for the guide down is the service provider space,” Robbins said during the earnings call, according to a Seeking Alpha transcript. “It’s 25% of our business roughly and it was down 12% in new orders and you guys know the content of our revenue that is from current quarter booking, so the forecast this past quarter and the performance was negative and we’re not just not modeling right now any improvement.”

Robbins added that while its service provider customers have not cited any spending pause due to the presidential election, the pending leadership changes at the FCC are a remaining concern.

“I do believe that the regulatory environment in the U.S. is obviously in flux now around the telecom environment,” Robbins said. “That could have implications for the service providers and some of them may wait and see how that plays out.”

Cisco’s product results were clearly a mixed bag. While Security and NGN Routing rose 11 and 6 percent to $540 million and $2.1 billion respectively, Switching decreased 7 percent $3.72 billion.

Meanwhile, Collaboration and Data Center each decreased 3 percent, and Wireless and Service Provider Video each decreased 2 percent.

One of Cisco’s future saving graces is the ongoing focus on software and services. Services revenue grew 7 percent to $3.05 billion. The vendor noted that its portfolio product deferred revenue related to its recurring software and subscription businesses grew 48 percent to $3.8 billion.

Despite the immediate pain Cisco is seeing with its legacy switching results, analysts agree that the shift to focus on software will provide long-term benefits.

“Cisco is prudently shifting its portfolio – leveraging acquisitions and organic investment – to include more software delivered via a subscription model prior to a significant deterioration in demand for its routing and switching hardware,” said Michael Soper, telecom analyst for TBR, in a research note. “Cisco will be able to partially compensate for declines in its hardware revenue over the long-term due to its growing focus on security, collaboration and video software and subscription services.”

Other customer segments such as enterprise and commercial grew 5 and 1 percent respectively, while public sector remained flat.

From a geographic perspective, Americas declined 4 percent, while EMEA and Asia Pacific grew 1 and 4 percent respectively. However, total emerging markets declined 2 percent with the Brazil, Russia, India and China (BRIC) countries plus Mexico up 2 percent.

After adjusting for the sale of its set-top box business, the past quarter showed sales at the top of the company's guidance of -1 percent to 1 percent growth year over year.

Cisco reported total first quarter 2017 revenue of $12.4 billion, down from $12.68 billion.