Industry Voices—Raynovich: Cisco takes a hit

Cisco Chuck Robbins
Cisco CEO Chuck Robbins is banking that the company's new Silicon One chip will take off over the next few months. (FierceTelecom)

Cisco shares are falling hard after the company reported lackluster growth across nearly all of its product segments except for cybersecurity on Wednesday. The less-than-stellar quarter comes at a time when Cisco is undergoing some big transformations, including the absorption of acquisitions of optical suppliers, as well as the launch of a new chip business through its Silicon One. 

In Thursday morning trading, Cisco shares were down nearly 6% (-$3.13) to 46.81. Cisco shares are now roughly break-even over the past 12 months, whereas the S&P 500 index is up about 20%. There is alarm over declining product orders, sluggish guidance, and cautious statements by Cisco executives about a slowing sales cycle. As measured by product orders, nearly all of Cisco's product segments except for cybersecurity showed negative growth. 

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Cisco's product orders fell 6% annually last quarter, its second fiscal quarter, after dropping 4% in the October quarter. Cisco executives were glum in their economic look, describing the market as slowing. The company issued guidance for revenue to be down 1.5% to 3.5% (annual rate) during its April quarter.

"We are seeing longer decision-making cycles across our customer segments for a variety of reasons, including macro uncertainty as well as unique geographical issues," Chief Executive Officer Chuck Robbins said on the earnings call.

The results highlight a major challenge that Cisco has in the market—the shift of enterprise IT spending from on-premises to cloud—while it looks to re-invent itself with a new business model of disaggregating infrastructure elements such as software and hardware and selling its new chip, Silicon One, to cloud providers. But that strategy was only recently announced so it's likely to be many months before this will help Cisco's cloud business. 

Was Cisco Zoom'd?

Overall, the company saw weakness in most of the segments of its business, including core infrastructure. Small-and-medium business (SMB) fell 4%, enterprise orders fell 7% and service provider orders fell 11%. 

Most worrying was the weakness in software and applications, which Cisco has been touting as a growth area over the past year. Cisco’s applications segment saw a revenue drop of 8% annually to $1.35 billion. This missed the analyst consensus of $1.43 billion badly. Cisco reported growth of 6% in this business as recently as the October quarter.

CFO Kelly Kramer said most of this weakness was concentrated in unified communications (UC). This includes Cisco's Webex unit as well as the BroadSoft business, which Cisco acquired in 2018. UC is not likely to get any easier, as the market is filled with capable competitors such as 8X8, Ring Central, the current darling of UC, and the IPO for Zoom Communications. 

Cisco's core infrastructure products weren't faring any better. Cisco’s infrastructure platforms segment fell 8% to $6.53 billion. Campus and data center switching sales also fell. 

The one bright side was Cisco's security product revenue, which rose 9% to $748 million, beating analyst estimates. 

Waiting for Silicon One

The next few months are going to be interesting to watch, as Cisco gears up its new application specific integrated circuits (ASICs), Silicon One, which will make Cisco a chip supplier. Traditionally, Cisco has packaged its own chips with its own systems, rather than selling them externally. 

The Silicon One move, announced in December, means that Cisco is offering a new routing operating system, XR IOS, that it hopes to be able to a sell to a broader market, including cloud providers. But the chip is also targeting the service provider segment, which has shown chronic weakness.

Cisco says that Silicon One will be an industry-leading chip with better power consumption and better performance, which will scale higher than 10 Terabits per second. It can be used for different applications, whether edge or core. It's also including hardware root-of-trust, an important security feature. 

Cisco is hoping that its Silicon One strategy will be a good one for so-called edge networks—where many devices and products first connect—which could be boosted by the rollout of 5G and new applications for business analytics and artificial intelligence (AI). But many other companies are going after the edge too, and it's not clear that hardware will be the best place to be, as heavy commoditization is expected in many edge devices such as switches. 

During the quarter, Cisco also announced that it had closed acquisitions of Luxtera and Acacia Communications, both optical networking technology providers. The bet here is that Cisco now owns its optical suppliers and can realize fatter margins with vertical integration‚another bet that will take many months to assess.

For now, investors are pulling back. 

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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