The market didn’t like Cisco Systems, Inc. (NASDAQ:CSCO)’s recent results much, but then again the stock is coming off a very strong run. In summary, I thought these results were bullish overall for US corporate IT spending but less so for Cisco. The company has heavy public exposure and it is going to have to weather pressure on the public purse in the US. Meanwhile, the global picture is somewhat mixed and investors need to think carefully about the takeaways from this report.
For ease of reference there is a preview of the results linked here. Revenues came in better than expected at nearly $12.1 billion, and the guidance was in line with previous estimates.
Starting with the core businesses of Switching, Routing and Services (which make up 69% of total revenues) the numbers came in a bit better than expected, but this was mainly due to good Switching numbers. Growth slowed a bit in Services (reflecting Cisco’s lower growth profile in recent years) and Routing was a bit worse than its usual Q2 decline.
Yearly growth rates here:
Overall the core grew 2.9%, which is incidentally below global GDP. Furthermore, I wouldn’t get too excited with Switching because Cisco guided towards revenues being flat for the next couple of quarters. Even with that forecast the picture is mixed. Switching revenues from the Government are pressured while the corporate sector is doing well. However, since Cisco has heavy government exposure its ability to grow the top line is impaired. Moreover, European enterprise orders in Switching were described as being down double digits. In other words, higher US corporate spending is not enough to bring growth going forward.
The decline in Routing was more than expected, and according to the management reflected the timing of some larger deals and challenges within Europe and China. Again, note how US Enterprise spending is not enough to generate growth here.
Collaboration and SP Video
Collaboration revenues fell a disappointing 11% while Service Provider Video rose 20% but most of this was due to the NDS acquisition. The challenges in Collaboration are coming from TelePresence with its US Federal business cited as a particular area of weakness. Elsewhere, its conferencing revenues were up 11%. I suspect that TelePresence’s weakness is also a function of renewed competition from Polycom Inc (NASDAQ:PLCM), which saw revenues rise five percent sequentially in its last set of results. Polycom has invested in revamping its product portfolio, and the plan was squarely aimed at taking market share from Cisco. It seems to be working.
I think these two divisions highlight a reoccurring theme. Cisco is finding it tough to focus in competition within its peripheral markets and is faced with a lot of macro challenges in its core. However, it has the cash flow and cash pile to make acquisitions in order to generate growth.