Cisco Warns on Outlook As Challenges Mount Cisco Systems Inc. (CSCO) -- WSJ

By Don Clark 

Cisco Systems Inc. showed more signs of pressure on some of its best-known networking hardware in the latest quarter, despite growth in smaller businesses it entered more recently.

The big Silicon Valley company said first-quarter net income fell 4.4%, largely because of restructuring charges, while revenue declined 2.6%. Cisco projected that revenue would decline again in the current period. Shares fell 4% in after-hours trading.

Cisco, based in San Jose, Calif., has long been a bellwether for shifts in corporate technology spending. Chuck Robbins, the company's chief executive, said Cisco's cautious outlook largely was shaped by weak demand from communications-service providers and the assumption that tepid economic conditions would continue.

"We are not going to model any improvement there," Mr. Robbins said during a conference call, though he added that Donald Trump's presidency could lead to more pro-business policies.

Cisco's charges in the first quarter largely stem from a plan announced in August to shed 5,500 employees, 7% of its workforce -- in the latest of a series of responses to market shifts that include customers opting for software and services over hardware. The company said its head count fell by 1,326 during the quarter to a total of 72,385.

Challenges facing Cisco include a preference among some web companies and network operators to avoid big-name hardware vendors. Some customers are choosing to run networking software on inexpensive commodity-style switching systems from vendors such as Taiwan's Quanta Computer Inc. Others are turning to external cloud services rather than buying and managing their own computers and networking devices.

Mr. Robbins cited other factors, including a reluctance by customers to upgrade the switching gear used on corporate campuses. Revenue from switching hardware, Cisco's largest business, declined 7%. Routing revenue rose 6%.

Mr. Robbins, who just completed his first year as chief executive, has tried to shift Cisco's focus toward faster-growing businesses built on software and services. Cisco said revenue from its security business rose 11%.

Revenue from its collaboration segment, however, fell 3%, as growth in services such as WebEx grew but sales of videoconferencing gear slowed.

Cisco said its data center revenue, which includes sales of server systems, declined 3%. Mr. Robbins said the company has been affected as companies shift from hardware with its longtime blade design -- with servers arrayed like books on a shelf -- to the more common arrangement that resembles a stack of pizza boxes.

Sales of wireless gear, which had been growing lately, declined 5%.

In all, Cisco reported net income for the quarter ended Oct. 29 of $2.32 billion, or 46 cents a share, compared with profit in the year-earlier period of $2.43 billion, or 48 cents. Revenue declined to $12.35 billion from $12.68 billion.

Excluding restructuring charges and other one-time items, Cisco put adjusted earnings per share at 61 cents. Analysts polled by FactSet had projected earnings on that basis of 59 cents.

For the current period, Cisco projected adjusted profit of 55 cents to 57 cents a share and said revenue would fall 2% to 4%, excluding the effects of a business in video delivery gear that was divested in 2015. Analysts on that basis had projected earnings per share of 59 cents on revenue of $12.16 billion.

--Nathan Becker contributed to this article.

Write to Don Clark at [e-mail]

(END) Dow Jones Newswires

November 17, 2016 02:48 ET (07:48 GMT)

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