Cisco Gives Sluggish Sales Forecast on Lingering Slowdown

Ian King (Bloomberg) -- Cisco Systems Inc. said revenue this quarter may decline more than analysts projected, indicating that corporations are still cautious about increasing spending on their computer networks.

Sales in the third quarter, which ends in April, will drop as much as 3.5% from a year earlier, the San Jose, California-based company said Wednesday in a statement. Analysts on average expected revenue of $12.6 billion, in line with the midpoint of Cisco’s forecast range. Adjusted profit will be 79 cents to 81 cents a share. Analysts had projected 80 cents, according to data compiled by Bloomberg.

Cisco is predicting a second consecutive quarterly revenue contraction, showing that its main business of selling expensive networking hardware is still struggling amid tepid spending by corporations and government agencies. While a push into software and services had eased the company’s reliance on hardware, such as switches and routers, that machinery still provides the biggest chunk of revenue. Cisco’s customers in certain markets and areas are putting off signing orders, Chief Executive Officer Chuck Robbins said.

“It’s just lower close rates and taking longer to get closed,” he said in an interview. “That tells you it’s a pause and not a cliff.”

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Cisco shares declined about 4% extended trading. They had earlier closed at $49.93 in New York, leaving them up 4.3% in the last 12 months. That compares with a 23% gain in the S&P 500 Index.

The company said net income in the fiscal second quarter rose to $2.88 billion, or 68 cents a share, from $2.82 billion, or 63 cents, a year earlier. Revenue fell 4% to $12 billion. Excluding certain items, Cisco posted profit of 77 cents a share. On average, analysts were predicting profit of 76 cents on sales of $11.98 billion.

Cisco’s hardware business generated sales of $6.53 billion in the period ended Jan. 25, a decline of 8% from a year earlier. Applications, its software unit, also dropped 8% to $1.35 billion and security revenue expanded 9% to $748 million.

In Europe, orders would have increased if not for the U.K., where companies and the government held off. Similarly, in Asia, China revenue dropped 30%, Robbins said. Without that drag, Asia as a region would have shown growth. In the U.S., Cisco’s largest and most profitable region, the company was hurt by slower server sales and the ongoing decline in orders from phone and internet service providers.

Robbins expressed his confidence in a rebound once issues including Brexit, trade and the health crisis in China are resolved.

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“There’s a lot of sprouts out there that lead me to continue to be optimistic,” he said.

Cisco, whose gear handles much of the world’s internet data traffic, has said that telecommunications service providers have pared spending on computer networks. Many are devoting the bulk of their budgets to purchases of radio equipment to build out coverage of new fifth generation, or 5G, cellular networks. Once those networks have been built out and are generating traffic, investment will shift to the kind of gear Cisco makes, for connecting the computers that handle the data-processing element of wireless services.