Cisco CEO: Political Uncertainty Causing Service Provider Spending Dip

Cisco's stock dropped 5 percent in after-hours trading on Wednesday after the networking giant projected a revenue decline that could be as much as 4 percent for its upcoming second fiscal quarter. The revenue decline is due to a slowdown in service provider spending, as companies watch how the U.S. and global political landscape will change following the election, according to Cisco CEO Chuck Robbins.

"There are some service providers around the world – not necessarily in the U.S. – that are dealing with political dynamics and potential regulatory issues that just aren't clear," said Robbins, during Wednesday's first quarter earnings call. "I have not heard a lot of U.S.-based service providers who have paused directly related to the election, but I do believe that the regulatory environment in the U.S. is obviously in-flux around the telecom environment and that could have implications for the service providers and some of them may wait and see how that plays out."

During the earnings call, Cisco gave a weak revenue guidance for its current second fiscal quarter, projecting revenues to decline 2 percent to 4 percent year over year. The San Jose, Calif.-based networking giant's shares dipped 5 percent, to $30.18 per share, after Cisco earnings were released.

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"If you look at our guidance, let me be clear, it's predominantly the service provider weakness and the overall capex challenges that we've seen in SP," said Robbins.

"Right now, I think there's a unique set of characteristics particularly in the SP space where you have the overarching macro uncertainty in the economy which I think has led to the service provider capex weakness that has been reported all year, as well as you have the political and regulatory environments that are somewhat uncertain both in the U.S. and around the world," said Robbins.

The CEO said Cisco's SP business represents roughly 25 percent of the company's overall business.

"It was down 12 percent in new orders," said Robbins. "The forecast this past quarter and the performance was negative 12, and we're just not modeling right now any improvement."

Robbins said he was optimistic that U.S. President-elect Donald Trump could improve the United States economy, which would benefit the tech industry.

"I think President-elect Trump appears to be very business-oriented and is very focused on driving the U.S. economy and anytime the U.S. economy improves that's certainly good for us," said Robbins, during Wednesday's first quarter earnings call. "Post-election, I think that most CEOs that I talk to, we are pragmatic about the results, and now we are all focused on the policy issues that matter to each of our companies."

Kent MacDonald, vice president of business development at Long View Systems, Calgary, Alberta, a Cisco Gold Partner, said the Canadian market were also closely watching the U.S. election to see what would change.

MacDonald said service provider revenues in the market have been flat to negative for the past number of quarters and "that whole vertical seems to be slowing down in their consumption around technology refresh."

However, as channel partners are more focused on the enterprise market compared to SP, the decline in service provider spending could be balanced out by boosts innovation in red-hot markets like security.

"So what they are losing there, we would hope to make up on them being on the front foot with security, the front foot in the data center and hyper-converged, and the innovation they're bringing in cloud with CliQr. The investment in innovation is what I see in Chuck [Robbins]," said MacDonald. "You get more wallet share in the service provider, but more so probably in the channel market with having a broader portfolio and a top-of-class offering, which we've seen the evolution in security."

Security was the shining star for Cisco's earnings, growing 11 percent year-over-year to $540 million. This was Cisco's fourth consecutive quarter of double-digit growth in security. Robbins said Cisco was the No. 1 global market leader in security with a run rate of well over $2 billion.

Furthermore, Robbins told analytics on the earnings call that Cisco's fast-paced acquisition strategy around security was not going to slow down.

"You can assume that we are actively continuing to scan the landscape relative to acquisitions that fit within the architecture that bring new capabilities," said Robbins.

"When I took the [CEO] role … there was a little pent-up demand from some companies that the teams wanted to move on. And we moved relatively quickly in the first year or so, but I wouldn't assume that that suggests that there's no more activity that we will see there -- I think we will," he said.

For its first fiscal quarter of 2016, Cisco reported revenue of $12.35 billion, down 3 percent from $12.68 billion, and 61 cents per share year-over-year.

Cisco slightly beat Wall Street analysts' expectations of 59 cents per share earnings on revenue of $12.33.

Profits for the quarter declined to $2.32 billion, or 46 cents per share, down from $2.43, or 48 cents per share, a year ago.

Overall, it was a mixed result for Cisco regarding specific market segments for its second quarter, which ended Oct. 29.

Most notably, the company's bread-and-butter switching business dropped 7 percent, to $3.7 billion, compared to a year ago. Cisco's routing business bounced back after several quarters of decline by increasing 6 percent, to $2.1 billion, year-over-year.

The vendor's collaboration and data center business both fell 3 percent year over year to $1.01 billion and $834 million, respectively. Cisco's wireless business declined 2 percent to $632 million compared to a year ago.

Deferred revenue was $17 billion, up 12 percent in total, with deferred product revenue up 19 percent driven largely by subscription based and software offerings, according to a release. Deferred service revenue was up 8 percent. The portion of product deferred revenue related to recurring and subscription businesses grew 48 percent to $3.8 billion.

Cisco will report its second fiscal quarter results on Feb. 15.