Global headwind buffets Cisco's Q1 results and Q2 guidance

Chuck Robbins/Cisco
Cisco CEO Chuck Robbins expects global client spending to be down in its current fiscal quarter. (FierceTelecom)

Cisco is often viewed as the bellwether company for the tech sector, which means the company's first quarter earnings and guidance may not bode well for the future. Cisco CEO Chuck Robbins cited several reasons for the uncertainty on the macro level during Wednesday's conference call with analysts.

"If you just go around the world right now and you look at what's happening in Hong Kong, you look at the China-U.S. trade situation, you look at what's going on in DC," Robbins said, according to a Seeking Alpha transcript. "You've got Brexit, and you've got uncertainty in Latin America…Business confidence just suffers when there's lack of clarity, and there's been lack of clarity for so long that I think it's finally just came into play."

Adding to the macro level economic issues, Robbins also cited the uncertainty around next year's elections in the U.S.

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While discussing the U.S. trade war with China, Robbins has previously said that Cisco doesn't do a lot of business there, but his company is being shut out from the bidding process. Cisco's Chinese product orders fell 31% on an annualized basis in the latest quarter compared to 26% in the previous quarter.

"I did say that we began to see some early signs of some macro impact towards the end of Q4," Robbins said. "And then we just basically saw that continue throughout the quarter and as obviously the entire (first) quarter was worse than we had expected when we began.

Robbins further described the first quarter as "as the worst quarter that could have occurred for us" based on comparisons to previous quarters and "we've effectively assumed that it will stay as is."

Robbins said Cisco could see improvements with the rollout of 400G and WiFi 6 and the continued transition to 5G. He also cited opportunities across cloud, automation, security and collaboration as reasons for optimism.

RELATED: Industry Voices—Raynovich: Service provider segment and China trade war weigh on Cisco

Cisco's first quarter numbers

Cisco's shares dropped 5.9% Cisco after it said second-quarter revenue would be down 3% to 5% from a year earlier to between $12.07 billion to $11.82 billion due to the macro economic conditions. Analysts were expecting second quarter revenue of $12.77 billion. In late morning trading on Thursday, Cisco's shares were down close to 7%.

Cisco reported revenue of $13.2 billion, which was an increase of 1% from a year ago, and slightly ahead of analysts’ consensus forecast at $13.09 billion. Adjusted profits were 84 cents a share, three cents ahead of Wall Street’s consensus at 81 cents.

On the earnings call, Robbins touted Cisco's progress in migrating from hardware-based revenues to software-revenues.

"With software subscriptions now at 71% of our software revenue, we are making good progress in transforming our business model," said Cisco CFO Kelly Kramer.

Cisco's Infrastructure Platform division, which includes its bread and butter switches and routers, posted $7.54 billion in revenue in the first quarter, which was down 1% year-over-year, primarily due to routing. Cisco's public sector was up 6% while enterprise and commercial were each down 5%.

RELATED: Juniper Networks' struggle for profitability continues in Q3 as service provider business slumps

Cisco competitor Juniper Networks said last month that its revenue dropped 4% year-over-year to $1.13 billion in its third quarter, but it posted a 3% increase over the previous quarter.

RELATED: Arista's stock stumbles on lower Q4 guidance due to softening of business from a cloud 'titan'

Arista Networks saw its shares tumble by as much as 25% last month after it provided fourth quarter guidance that was well below analysts' expectations. While Cisco cited macro headwinds for its lowered guidance, Arista CEO Jayshree Ullal said his company would experience declining revenue from an unnamed cloud provider.

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