Cisco Outlook Shows Robbins Turnaround Hasn’t Spurred Growth

Ian King (Bloomberg) — Cisco Systems Inc., whose machines form the backbone of the internet, predicted another revenue decline as the company tries to remake itself amid a changing networking industry.Revenue in the current period may decline as much as 3 percent from a year earlier, the San Jose, California-based company said. That indicates sales of as little as $11.98 billion and compares with an average estimate by analysts for $12.1 billion. Net income in the fiscal first quarter, which ends in October, will be 48 to 53 cents a share. On average, analysts project earnings of 52 cents.

Cisco’s transition into a company that’s less dependent on hardware is hurting its overall growth as the software and services businesses that Chief Executive Officer Chuck Robbins is trying to build take time to gain ground. The company still gets the biggest chunk of revenue from high-priced hardware and that’s a challenge during an industry shift toward cheaper, software-based networking.

“It’s a big company and this kind of transition just has to be a gradual one,” said Simon Leopold, an analyst at Raymond James & Associates. “People will be patient. If you ask me how patient, I can’t say.”

Cisco shares fell 3.7 percent to $31.14 at 10:03 a.m. in New York Thursday. That brought its gains for the year to 3 percent, compared with a 17 percent gain by the Nasdaq Composite Index.

Cloud Competition

Robbins is working to restore the kind of growth that made Cisco one of the world’s largest companies. The networking-gear maker hasn’t reported an annual revenue gain of more than 10 percent since 2010. His effort to fire up sales are being hampered by a shift to computing in the cloud — in remote data centers that provide services over the internet. Owners of such facilities like Amazon.com Inc.’s Amazon Web Services, are increasingly building their own hardware and replacing traditional suppliers of servers, storage and networking.

Profit in the fiscal fourth quarter, which ended July 29, was $2.42 billion, or 48 cents a share. Sales fell 4 percent to $12.1 billion, Cisco said Wednesday in a statement. That marked the seventh consecutive year-over-year contraction in quarterly revenue. Analysts on average projected profit of 51 cents a share on revenue of $12.06 billion, according to data compiled by Bloomberg.

Sales in Cisco’s biggest business, switching, declined 9 percent in the fourth quarter as did revenue from routing, the second-largest unit. Collaboration, which includes videoconferencing, fell 3 percent.

Cisco’s customers had held back on ordering ahead of the company offering a new set of products for the switching market, according to Robbins. That was just a “pause” and demand for the new range of switches is good, he said. Overall, orders improved in the quarter compared with the preceding three months.

Slower Transition

The company’s transition into a software company that books recurring revenue is more difficult than at other companies because Cisco has traditionally been paid upfront for hardware, he said in a phone interview. Offering switches and routers that are more flexible and come with software-as-a-service subscriptions will help speed up that shift and rekindle revenue growth, he said.

“One of the key things that we needed to do was get some energy in our core markets,” Robbins said. That started with the offering of new switch products in June. “You’re going to see more and more of that innovation coming from us.”

Software and subscription deferred revenue is now more than $5 billion, Robbins said. That represents a gain of 50 percent from the same period a year earlier. He declined to predict when company revenue will return to growth.

“I don’t believe that any type of company has been through the type of transition that we’re going through,” he said. “It may take a little longer. I feel good about where we are.”