Cisco’s Revenue Declines Likely To Continue

by Trefis Team
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Networking giant Cisco (NASDAQ:CSCO) is scheduled to announce its Q1 fiscal year 2018 earnings on Wednesday, November 15. The company has reported a decline in net revenues over the last couple of years, driven by stagnating core product sales. Cisco reported revenue declines for product streams including network switches, routing, data center and collaboration. On the other hand, wireless and network security product sales were up in fiscal 2017, offsetting the decline in other product streams. Moreover, Cisco also witnessed growth in its services revenues. This trend is expected to continue in the current fiscal year, with declining prices and limited growth in demand leading product hardware sales to remain low.

We have a $33 price estimate for Cisco’s stock, which is in line with the current market price.

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Soft Guidance For First Quarter

Cisco’s management gave soft guidance for the fiscal first quarter, with revenues expected to fall by around 2% to $12.1 billion. Cisco expects its non-GAAP gross margin to be around 63.5% for the quarter, which is 170 basis points lower than the first quarter of FY 2017. Similarly, its operating profit margin (non-GAAP) is expected to be around 160 basis points lower than the year-ago period at 30%. Resulting non-GAAP diluted earnings per share are expected to fall by around 2% on a y-o-y basis to 60 cents a share.

Key Trends Across Segments

Through the course of its fiscal 2017, Cisco reported a 2% decline in net revenues to $48 billion. Combined revenues generated from sales of routing products and network switches through the year were down by over 5% over the comparable prior year period to under $22 billion. In addition, revenues generated from collaboration and data center products also fell on a y-o-y basis, as shown below.

On the other hand, Cisco reported positive trends from its network security solutions and wireless product segments. Cisco also acquired cloud security firm CloudLock with the intent to further improve its presence in this domain. The company added around 6,000 new customers in this space in the most recent quarter, which was over three times its nearest competitor. Cisco now has over 80,000 customers for its network security solutions.

Similarly, robust demand for wireless products is attributable to a refreshed product line for the 11ac Wave 2 products and strong performance of Meraki products. This was similar to the strong growth reported by Cisco for these segments in previous years as well. This trend is expected to continue given Cisco’s market leading position in the wireless equipment space (read: Cisco To Remain A Formidable Player In The Enterprise WLAN Market).

Cisco’s services have grown at a consistent pace over the years due to the increasing mix of service and subscription-based solutions on offer. Post-sales services and subscription-based revenues are more beneficial to Cisco since they are annually recurring revenues, compared to the lumpy demand caused by product life cycles extending for multiple years.

In addition to lower revenues, Cisco reported lower gross and operating margins in fiscal year 2017. Lower gross margins were due to pricing pressure and increasing competition from smaller players in individual markets such as network security, routing, switching and data center products. This can be a worrying trend for larger players, particularly Cisco, since margins fell for the products and services revenue streams.

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