Cisco First Quarter Beats Expectations, Q2 Outlook Misses

Networking giant Cisco Systems reported first-quarter results that were slightly ahead of expectations, prompting its shares to rise initially nearly two percent in after-market trading. But its guidance for the second quarter came in lower than expected, prompting its shares to give back those gains.

CEO John Chambers, speaking on a conference call with analysts, blamed the weak guidance in part on slower spending by service providers like AT&T, and linked that to worries that they may face more regulation from the federal government around net neutrality concerns.

“At AT&T, we know their capex is going to go down by a fair amount,” Chambers said. It will slow further, he said, if the FCC were to impose new regulations on how service providers sell their services. “If they can’t make money, they won’t build out their broadband networks,” he said. (More about all that from Amy Schatz and Peter Kafka here.)

Telecom providers around the world are “struggling big time in certain geographical areas with costs that are flat or going up,” he said. Cisco’s sales to telecom service providers in the U.S. fell 18 percent, offsetting otherwise strong sales in the U.S. that grew by three percent overall.

Chambers’ comments came after Cisco reported a per-share profit of 54 cents on sales of $12.25 billion. The results were better than analysts’ expectations of 53 cents a share on revenue of $12.2 billion.

But the company’s guidance for the second quarter quickly turned the tide and sent the shares falling after hours. Chambers said the company expects second-quarter sales to grow between four percent and seven percent, lower than the eight percent that analysts had projected. Earnings on a per-share basis will come in between 50 cents and 52 cents versus the 53 cents expected.

Overall sales rose 1.3 percent, in line with expectations it set last quarter. Chambers said he was “pleased with our results,” but said Cisco is “still in a tough environment, but seeing encouraging trends as cities, businesses, governments and schools are becoming more digitized.”

The results were led by a three percent year-on-year surge in sales of switching equipment, its biggest business. Routing, its second-largest product segment, fell four percent. Sales of collaboration software and hardware fell 10 percent. Sales of data center products rose 15 percent year on year but that’s a smaller business that accounts for only six percent of revenue.

Cisco also saw recovery in some of the international markets where it has struggled in recent years. Sales in Europe grew six percent, led by a 20 percent improvement in sales in the U.K., and six percent in Germany. Sales in the Americas grew two percent, and three percent in the U.S. Sales in Asia fell by more than five percent.

Chambers said that after backing out sales to U.S. telecom service providers, which declined by 18 percent, U.S. sales would have grown 12 percent. Sales to U.S. federal agencies rose 34 percent, and to state, local and federal agencies combined rose 22 percent.

Sales to large telecom service providers and cloud computing companies have been a tough nut to crack for Cisco and other networking companies like Juniper Networks in recent months as those companies have curtailed some of their spending on new networking equipment. “Enterprise CIOs that I meet with are looking for ways to get away from Cisco, not get closer, and they’re using their private cloud projects to do it,” said Patrick Moorhead, an analyst with research firm Moor Insights and Strategy. “Overall, Cisco is having a tough time growing its business, but its recent acquisitions like MetaCloud haven’t yet kicked in.”

The company also announced that CFO Frank Calderoni will leave the company effective Jan. 1 and will be replaced by Kelly A. Kramer, currently a senior VP. Kramer, 47, joined Cisco in 2012 as Senior Vice President after a 20-year career at GE.

This brings us to the quarterly song. It’s now a tradition and a bit of a running gag between Chambers and me, where I choose a song that sums up Cisco’s quarter. Given the relatively good results in Q1 but the iffy outlook in Q2, I’d think that Chambers will seek to rally the troops and motivate them to try selling a little harder in Q2 in order to beat that guidance. So sticking to my usual preference for classic rock, I decided on Janis Joplin’s “Try (Just a Little Bit Harder)” from her iconic performance at Woodstock in 1969. Enjoy.

http://youtu.be/dBJnoMP1Uyc

This article originally appeared on Recode.net.

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