Industry Voices—Raynovich: Cisco bounces back in Q1

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Cisco is on the rebound in its first quarter earnings, but questions remain as to whether it can keep that momentum going forward. (FierceWireless)

Cisco shares rose as much as 8% in after-hours trading after the company reported an upbeat first fiscal quarter of 2021 (FQ21) after markets closed. Earnings exceeded the substantially lowered expectations the company had set after its last downbeat earnings report that resulted in the company issuing annual revenue guidance for a 10% decline. 

RELATED: Cisco implements restructuring plan, including layoffs, as stock tumbles

Cisco reported earnings of 76 cents per share vs. the 70 cents per share expected by analysts, according to Wall Street projections. Revenue was $11.93 billion versus the 11.85 billion expected by analysts, according to research firm Refinitiv.

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Cisco wasn't that far off the expected forecast of a 10% decline. The company's revenue declined 9% on a year-over-year basis in the quarter, the same as the revenue decline in percentage terms that it reported in the final fiscal quarter of 2020, ending in July. On that earnings report, Cisco shares fell sharply.

Overall, Cisco CEO Chuck Robbins said he was pleased with the quarter, saying that buyers came back into the market after a complicated pattern resulting from the COVID-19 pandemic. Robbins said that customers reacted as management expected, at first pausing traditional spending to focus on the work from home (WFH) security and conference solutions needed for remote work. Cisco reported growth in security and WebEx conferencing services but a decline in enterprise hardware sales. The company reported a year-over-year bump in security sales of 6%. But Robbins said he believes that normal activity in the enterprise market is starting to resume. 

Robbins also pointed to a boost from government buying programs related to stimulus as government sales popped 5% while enterprise sales sunk 15%. "There was a lot of stimulus worldwide," Robbins said. 

Will WebEx and security be enough for Cisco going forward? While helping staunch the slump of revenue in other areas, it's not adding enough to offset a decline of top-line revenue. 

Investors look for stabilization 

So what exactly were investors looking for? It appears they may have just wanted the bleeding to stop. Cisco's last quarter was enough of a shock that a beat in new expectations appears to have placated them for now. And Cisco shares are paying a 4% dividend, enough to keep many investors in place. 

On the bright side, Cisco executives cited progress in converting perpetual on-time hardware and software sales to subscription revenue by growing recurring license revenue to 75%, up 7 points. 

But many trends appear to still be in place, pandemic or not. Cisco's communications and enterprise sales are slumping. Cisco is still on track to cut a projected $1 billion in costs, laying off thousands of employees, while smaller competitors in both networking and security services grow. For example, Arista Networks appears to have grabbed market share from Cisco in the quarter, reporting sequential revenue growth of 12% (although on a year-over-year basis, revenue shrank 7.5%), fueled by gains in enterprise campus networking.)

Cloud security vendor Zscaler, which competes with Cisco in some areas of cloud security, recently reported year-over-year revenue growth of 46% and its stock has vaulted more than 100% in the past year. 

Analysts question the numbers

In a Q&A with analysts after the conference call, Cisco batted back skeptical questions about "mismatched numbers," such as a reported decline of 5% in orders while the company forecast flat growth going forward. Robbins and departing CFO Kelly Kramer said the company had confidence in its existing order book to overcome the decline in orders to execute on flat revenue growth for the next quarter.

Analyst also questioned that government orders were strong while enterprise sales dropped 15%, raising doubts as to whether government strength is sustainable. Cisco management reiterated that it sees enterprise sales recovering. 

Meanwhile, things are still miserable in the infrastructure segment, where Cisco's sales fell 16% y/y. Robbins countered by reporting that the company sees a positive reception of its new Silicon One strategy of separating hardware and software in its advanced routing platforms targeting cloud and the service provider markets. 

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"We have won across every one of those facets," said Robbins of Silicon One packaging. "The pipeline looks very strong."

Investors will have to wait another quarter to see how much of this is true. 

 R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.

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