Cisco Systems (NASDAQ: CSCO) on Wednesday delivered a weaker-than-expected revenue forecast for its current quarter -- pointing to continued challenges in the large service provider market.
Indeed, Cisco projected a revenue decline between 2% and 4% year over year for the quarter ending in January 2017; analysts had been expecting a small gain, The Wall Street Journal noted. Take a closer look and you'll see that service providers represent roughly 25 percent of Cisco's business, and new orders dropped 12 percent during the company's just-announced Q1 results, CEO Chuck Robbins conceded.
Investors were surprised by the weakness; Cisco shares are down roughly 4 percent in after-hours trading as of 9:42 p.m. PT on Nov. 16.
Cisco Service Providers: Similar Story, Different Quarter
Concerns about service provider IT spending have become a familiar refrain. Cisco in August 2016 warned of weak service provider CapEx spending. Telcos, no doubt, are getting squeezed on multiple fronts. Some -- including CenturyLink and Verizon -- attempted to compete head-on against Amazon Web Services and Microsoft Azure before retreating to network services. Others have been juggling consumer and corporate priorities across physical, virtual, wired and wireless communications.
Further complicating matters for Cisco, some telcos are testing Open Compute Project (OCP) technologies pioneered by Facebook and various open source partners.
Privately, some partners worry that Cisco will increasingly promote its own IT consulting services to end-customers. In theory, the move could help Cisco to potentially offset weak service provider revenues. But such a strategy could also trigger new sales conflicts between Cisco and its channel partners.
During Cisco Partner Summit in early November 2016, the company conceded that some channel partner conflict has occasionally surfaced. But Cisco Services, the networking giant’s professional services arm, has vowed to update its partner engagement policy (PEP) within the next few weeks to mitigate potential channel conflict.
Cisco MSPs, Enterprises and SMBs
Overall, Cisco seems to to be doubling down on enterprise computing -- battling Dell EMC, Hewlett Packard Enterprise and IBM Corp. to control next-generation corporate data centers. The company also sees the Internet of Things (IoT) and security as core areas for potential growth.
Cisco has been particularly quiet in the small business market, where MSPs increasingly manage and control IT infrastructure for end-customers. Cisco partners with distributors to reach those SMB partners and customers. But I don't believe Cisco has made much noise with those distribution relationships in recent quarters. A huge exception includes OpenDNS, a Cisco security platform that MSPs are deploying quite aggressively.
Despite some business challenges, Cisco remains profitable and the company's shift from traditional CapEx hardware sales toward more software and OpEx opportunities continues to accelerate. Revenues in its just-announced quarterly results were $12.4 billion, down slightly from the corresponding quarter last year. Net income was $2.3 billion, down 4 percent from the same quarter last year.
Cisco SaaS, OpEx and Recurring Revenues
Among the big momentum statements: The portion of product deferred revenue related to recurring and subscription businesses grew 48%, Cisco said. That's a fancy way of asserting Cisco's SaaS-based businesses are growing rapidly. Here again, offerings like OpenDNS figure into the conversation.
Cisco Capital, the company's financing arm, has also launched programs to help customers shift hardware projects from a CapEx to an OpEx conversation.
Those are solid moves. But evolving the business beyond Cisco's core routing and switching hardware lines remains a daunting task.