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Cisco Falls on Mixed Q1 Results, Weak Outlook

An earnings beat, but sales overall are growing slowly.

Ken Wolter / Shutterstock

Shares of the networking giant Cisco Systems fell by more than 5 percent in after-hours trading as the company reported earnings that beat the estimates of analysts but lowered its guidance for the second quarter.

Cisco posted earnings of 59 cents a share, up 9 percent from a year ago and besting the 56 cents expected by analysts polled by Thomson Reuters. Revenue was $12.7 billion, up more than 3 percent versus the year-ago period and in line with expectations.

The company trimmed its forecast for second-quarter earnings, saying it expects to post between 53 cents and 55 cents a share, lower than the 56 cents expected. Cisco also said it expects sales in the second quarter to come in flat to up 2 percent year-on-year.

“I recognized that our Q2 guidance was below what the market expected,” CEO Chuck Robbins said on a conference call. He said orders slowed during the first quarter somewhat because of concerns of some customers about currency worries, mainly driven by the strong U.S. dollar. “Despite these headwinds, I believe we are executing well in a challenging environment. … We feel good about our momentum heading into the second half of the year.”

Sales of products rose 4 percent, while revenue derived from services rose 1 percent. Products sold into data centers rose 24 percent, and sales of collaboration products rose 17 percent. Sales of wireless and security products both rose 7 percent. Sales of switches, Cisco’s biggest single business, accounting for about 32 percent of sales, rose 5 percent. Router sales fell 8 percent. Sales of video products to cable service providers fell 2 percent.

When broken down by region, sales in the Americas region rose 4 percent, while sales in Europe and Asia both rose 3 percent. Robbins said sales in the U.S. held up but said results were weaker than expected in Canada, Latin America and the Asia-Pacific region.

Cisco’s gross margin, a key measure of profitability, fell slightly year-on-year to 63.2 percent from 63.3 percent a year ago. The company exited the quarter with $59.1 billion in combined cash and short-term investments.

On the conference call, Robbins seemed unconcerned about the potential impact on Cisco’s business of the pending acquisition of EMC by computing company Dell. Cisco’s Unified Computing System — its main offering for data centers — is a product that combines computing, storage and networking, but the company doesn’t own any storage assets. Instead it offers storage products from EMC, NetApp, Hitachi and IBM as an option in UCS products. “So far our partnering strategy seems to be working,” Robbins said in response to a question about the potential for buying a storage company. “But you can assume we’re constantly looking to see what we can add to the portfolio.”

Update: In an interview with Re/code Robbins said that one reason he’s feeling confident about Cisco’s prospects for the second half of the fiscal year lies in the switching business. Sometime during the second half of the year, sales of a new generation of switches — Cisco’s main product — will overtake those of its older switching products. “One of the reasons we feel good about the second half is that we’ll hit that inflection point,” he said.

He also talked about Cisco’s strategic partnership with Ericsson, the Swedish telecom company. Ericsson has, he said, a “tremendous footprint for delivering services around the world” and a substantial reach into wireless services providers, too. Cisco, he said, can help Ericsson with capabilities to quickly roll out and provision new features and services on those networks. “Each of us brings market leadership in some complementary areas,” he said.

The partnership with Ericsson is the third like it that Cisco has announced since Robbins took over as CEO. The other two are with Apple to push iOS devices into the enterprise, and a joint venture with Inspur in China. In those instances where Cisco can’t readily grow by launching a new product or by acquiring a company, you can expect more partnerships, he said.

Now we’ve reached that part of the post where I pick a song that sets of the tone of Cisco’s quarter. It’s been a running joke between me and Robbins’s predecessor John Chambers for about five years, and one I’ve opted to continue with Robbins.

While he was clearly happy with the results of this quarter, he clearly can’t be exactly, well, satisfied, at least not entirely. Secondly, I just learned that Robbins turned 50 on Nov. 5. That caused me to look back on the musical calendar for a song from the year that Robbins was born, 1965. The choice was pretty obvious. This quarter’s Cisco song is “Satisfaction” by the Rolling Stones. Enjoy.

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