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Cisco – no short term 5G uptick for its beleaguered telco business

Many vendors are talking up 5G as their way to a more profitable telecoms business after a period of intense competitive pressure and slowing operator spending. Ericsson, in particular, has placed many of its eggs in the 5G basket to effect a turnaround, and has shown some early signs of success, though even the Swedish giant admits that there is a risk of a hiatus in large 5G deals once the first group of early movers have built their first-stage networks.

Cisco, which has also talked about 5G as a growth engine in the past, now has a very downbeat outlook for the technology, and for the service provider market in total, at least for the short to medium term. The company, in theory, has much to gain from the shift of carrier networks to become cloud-based, fully IP systems, and it has scored some early successes for its cloud-based core platforms. But its service provider business has been Cisco’s worst performer for some quarters now, and CEO Chuck Robbins was not holding out short term hopes at the recent quarterly earnings call.

In its fiscal fourth quarter, which ended on July 27, Cisco saw its service provider (SP) division suffer a 21% year-on-year fall in revenues, even though total group revenue was up both for the quarter and for the fiscal year.

Robbins said on the analyst call that, in the SP business, sales in the Americas were stable compared to the third quarter, and Europe had grown, but the overall figures were hit by slowdown in Asia, especially China. And while Cisco had been involved in two “massive build-outs” in India last year, those operators were not spending at the same level in 2019.

“That’s the net of our provider situation. It’s not more complicated than that,” Robbins said bluntly, and he does not anticipate any short term improvement in the SP unit because operators are focusing on first-stage, consumer-focused 5G build-outs in 2019 to 2021, but are not expecting “huge profit” from those projects. Therefore, their willingness to invest in large-scale expansion, or particularly in new architectures such as cloud-native cores (where Cisco can score), will be limited for now. That appetite for major deployments of new architectures will come with the roll-out of “more robust and broader infrastructure” for enterprise services at a later stage, Robbins believes.

“We’re not modeling and don’t anticipate any significant improvement in [the service provider] business in the very near term,” he said. “It’s been a tough business for us for years and it obviously represents a far smaller percentage of our business than it did five years ago, but it clearly was a major point of weakness for us in the last quarter.”

In Cisco’s wider business, enterprise sales were also down year-on-year in fiscal Q4, though only by 2%, while public sector sales were up 13% and the commercial division up 7%. By region, sales in the Americas were up 1% in total, EMEA by 4% and Asia-Pacific was down by 8%. Cisco is suffering from US-China trade tensions, in the SP division and elsewhere. Although China has not been “a major place for us”, according to Robbins, it has “just dropped precipitously” because of the trade wars, and he has particularly seen a sharp drop in sales to large Chinese operators, and an exclusion from enterprise RFPs. “It was a much faster decline than we, candidly, expected,” he said.

Overall, Cisco reported $13.4bn in fiscal Q4 revenue, up 6% year-on-year. Revenue for fiscal 2019 was $51.8bn, up 7% on 2018. Non-GAAP earnings per share for the quarter were $0.83, up 19% year-on-year.

The outlook for the first quarter of fiscal 2020 is for revenue growth of between zero and 2%, with non-GAAP earnings of $0.80 to $0.82 per share. Shares fell 8% because this forecast was below what Wall Street had hoped – analysts were looking for a 2.5% increase in revenue to $13.4bn with 0.83 earnings per share.

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