Enterprise network spend hits the brakes – and Cisco's OK with that

The financial market turmoil that's characterized 2016 has led Cisco to set modest expectations for the coming three months.

Having said that, the networking giant is pleased with its performance in Q2 of its fiscal 2016, aka the quarter to January 23.

Its US$11.8bn second quarter revenue (normalized to exclude the cable modem business sold to Technicolor) was up two per cent year-on-year, and net income shot up 31 per cent to $3.1bn (compared to $2.4bn for Q2 2015).

CEO Chuck Robbins said enterprise customers have prioritized the most mission-critical activities for spending – i.e., data center transitions and security – and on enterprise networking products. "Where customers had the option to wait, they chose to wait a bit," said Robbins.

Regarding the macro-economic environment, he told the earnings call: "While macro growth has slowed, the speed with which technology is changing every company and every country has not slowed," which makes him optimistic that the company can still identify growth opportunities.

Looking down the full product set, switching, at $3.48bn, was four per cent down year-on-year; routing rose by five per cent to $1.845bn, collaboration rose three per cent to $1.02bn.

Data center products and campus-level products have been impacted by customers holding back on their spending decisions. That slowdown in spend led data center products down by three per cent year-on-year, and kept the wireless business flat.

Service provider video rose 37 per cent to $569m, security was up 11 per cent to $462m, other products reached $77m, and services – which gave Cisco a strong annuity revenue, she noted – rose three per cent to $2.944bn.

CFO Kelly Kramer noted some individual products that performed well: WebEx, Meraki Cloud Networking, and cloud security all recorded double-digit revenue growth.

The company's strategy to revive its fortunes in China gave it more than 60 per cent growth in that country, adding growth of 17 per cent to the APJC region and helping offset a flat quarter in the Americas and a decline of one per cent in EMEA.

China's growth was very well balanced across multiple products, he said, and India's whole-of-country digitization effort is also delivering for The Borg.

Robbins said the next quarter is going to remain challenging. Customers digesting the financial market turmoil that emerged in January have "paused" in their purchasing, he said.

"I would say that we took that sort of feeling into consideration as we built our guidance," said Robbins – which translates as a prediction of between one per cent and four per cent growth for Q4.

That volatility is reflected in the three per cent guidance range, which Kramer said is "prudent." Cisco's "funnels" are good, she added.

In the longer-term future, Robbins said the company is "aggressively focussed on winning the 10 Gig / 40 Gig / 100 Gig transition in the data center."

"On the new orders side of the data center switching, we did see slightly positive growth on orders," Robbins said, which makes the company "cautiously optimistic" for the next quarter. ®