Networking vendor posts declines and issues lower forecast despite increasing demand for products, services
Cisco’s first earnings report since the arrival of COVID-19 came with few surprises, but remains a harbinger of things to come for the technology industry as quarterly revenue declined and the full-year forecast sank despite increasing demand.
The Lowdown: Earnings for Cisco’s third quarter were down 7.5%, as sales of its core infrastructure networking and data center products sank. For the full fiscal year, which ends in July, Cisco projects a year-over-year decline of 8.5% to 11.5% as the recession caused by the pandemic hampers IT investments.
The Details: The sour earnings report from the world’s largest networking vendor come as no surprise, as IT spending is down because businesses disrupted by the COVID-19 pandemic cut spending to conserve cash. Nevertheless, Cisco — like other technology vendors — says demand for products and services is up. Businesses, it says, continue to invest in digital transformation, collaboration, and security. The challenge to earnings is dependent on how hard hit different industries are. Sectors such as retail, travel, and hospitality are spending little, which accounts for much of the decline.
Cisco reports demand for its non-core products, such as security and videoconferencing (Webex) are up. The company’s security division saw saw an increase of 6%. The applications business, which includes videoconferencing, fell 5% but Webex is running three times its pre-pandemic capacity.
The Impact: While Cisco continues to pivot its revenue model to software and cloud services, the bulk of its revenue remains in hardware. This makes Cisco a barometer of the rest of the IT hardware segment and channel. The projected decline in earnings up to 11.5% is higher than the current IDC forecast, in which IT spending will decline 2.7% overall, 3.3% for storage and servers, and 1.7% for IT infrastructure. The Cisco forecast, which projects the company’s first decline in three years, doesn’t necessarily reflect the full calendar-year 2020. As the economy recovers, the Cisco numbers may normalize and align more with the IDC forecast.
Background: Cisco is among the technology vendors leading efforts to minimize the impact of the pandemic on its partners and customers. The company donated $225 million to COVID-19 research and created $2.5 billion in financing to aid partners and customers.
The Buzz: “I am confident Cisco is resilient, and we are built to last regardless of what the future brings,” said Cisco CEO Chuck Robbins in a earnings call with analysts.