Cisco's Q1 issues carry over into Q2

Emerging market softness, product transitions and service provider slide continues

The same three issues that plagued Cisco's Q1 impacted the company's second quarter as well: softness in emerging markets, order and revenue depression in service provider video, and new product transitions. This is despite the company actually beating Wall Street estimates in revenue and earnings per share.

Emerging markets are challenging not only for Cisco but for the industry overall. In Q1, emerging markets orders, which is over 20% of Cisco's product business, were down 12%. Seventy percent of product revenue is dependent on new orders each quarter.

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Q2 couldn't have helped. Emerging markets orders were down another 3% in the quarter, and while not as drastic a fall as Q1 it's still down from a 13% order increase in Q3 of fiscal 2013. Notes Technology Business Research's Scott Denehy:

Cisco experienced year-to-year product order declines across all of its key emerging markets in (2Q14), as customer demand continues to fall due to economic concerns in those countries and the company manages through product transitions in the service provider segment.

Those service provider product transitions include the introduction of the Network Convergence Systems (NCS) and the CRS-X core router. Existing CRS-3 users are pausing as they contemplate these upgrades and its hitting router revenue and orders, which were down 11% and 5%, respectively, in Q2.

Service provider orders were down 12% from last year's Q2, consistent with Q1's 13% drop.  Service provider revenue was down 22%. In addition to the core routing transition, service provider video played a role in the shortfall, with set-top box orders down 20%.

Excluding service provider video, service provider orders overall were down 7%.

Another product transition that might be impacting Cisco is in data center switching, with the introduction of the Nexus 9000. Data center revenue was up 10% in the quarter but switching revenue was down 12%, and competitive pricing was not the culprit, Cisco CEO John Chambers said in the Q2 earnings conference call - it was low volume and a low margin product mix.

Cisco also said it was pleased with Nexus 9000 orders, that it's ramping on schedule and the company is taking share in 10G and 40G in the data center market. But Chambers also acknowledged a pause may be coming as more customers consider the Nexus 9000 and 7700 lines.

Says TBR's Denehy:

Cisco's revenue will improve throughout 2014 as customer adoption of recently released, high-end switching and routing platforms, including the CRS-X, NCS, and Nexus 9000 ramps up and the company leverages its dominant market share position, broad solution portfolio and industry-leading channel partner base to successfully capitalize on growth opportunities being driven by cloud, mobility and security. However, Cisco will likely not achieve year-to-year revenue growth again until late 2014 or early 2015.

In other words, not until fiscal 2015.

So that means Q2 issues will persist into Q3. And Cisco told Wall Street to expect as much: revenue down 6% to 8% from last year, and earnings about the same as 2014's Q2.

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