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Cisco tops Q1 expectations, forecasts Q2 revenue decline, says enterprise demand weaker

For the current quarter, Cisco expects revenue to decline between 3% to 5% decline from the year-ago period.
Written by Natalie Gagliordi, Contributor

Cisco reported better-than-expected first quarter financial results on Wednesday as it works through a continued slowdown in customer demand. Cisco said it expects revenue to decline in the current quarter, citing a challenging macro environment that's causing customers to pump the brakes. 

For the first quarter, the company reported a net income of $2.9 billion, or 68 cents per share. Non-GAAP earnings were 84 cents per share on revenue of $13.2 billion, up 2% year over year.

Wall Street was looking for earnings of 81 cents per share with $13.09 billion in revenue

For the current quarter, Cisco expects revenue to decline between 3% to 5% decline from the year-ago period, with EPS between 75 cents a share and 77 cents a share. Wall Street is looking for non-GAAP earnings of 79 cents per share with $12.77 billion in revenue, or an increase of 2.8%.

Cisco had indicated on its Q4 earnings call that it had begun to see some weakness in a challenging macro environment. Cisco now says that that weakness continued throughout Q1 and was more broad-based.

On a conference call with analysts, CEO Chuck Robbins laid out the demand landscape. 

Over the last year, many of you have heard me talk about the resilience of the global macro environment. However, on our last earnings call, we indicated that we had begun to see some weakness, and that weakness continued throughout Q1 and was more broad-based.  While the main challenges continue to be service provider in emerging markets, this quarter, we also saw relative weakness in enterprise  and commercial. Despite these headwinds and because of key decisions we made 4 years ago to change our business model, we remain well positioned to capitalize on the tremendous opportunities across cloud, automation, 5G, security and collaboration.

Our transition to software continues to progress, and we are on track with where we said we would be at the end of fiscal year 2020. This transition to software not only aligns to how our customers want to consume our technology but we also believe it will lessen the impact of macroeconomic shifts in the future.

Breaking its Q1 revenue down by segment, Cisco said product revenue was $9.87 billion, up 1%, and service revenue was up 4% to $3.2 billion. Infrastructure platforms revenue fell 1% to $7.54 billion. Applications revenue increased 6% to reach $1.49 billion, and security revenue grew 22% to $815million. The "other" category fell 85% to $26 million. 

Cisco CFO Kelly Kramer said software subscriptions now account for 71% of the company's software revenue. 

"We performed well in Q1, growing revenue and delivering strong margins and EPS," said Kelly Kramer, CFO of Cisco. "With software subscriptions now at 71% of our software revenue, we are making good progress in transforming our business model. We continue to invest in our innovation pipeline to generate long-term profitable growth and deliver value for shareholders."

Cisco's shares were down around 5% after hours. 

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