Cisco may be the most important network provider, but it is also not immune to the ongoing product digestion stage in the service provider industry.
Recently, Cisco CFO Richard Herren told investors during the first quarter earnings conference call that the challenge from service providers has been ongoing for some time. He said, “I expect the service provider sector to continue to face difficulties in the second half of this year. Among service providers, we have telecommunications and cable TV, and their markets are fluctuating. I believe this will continue to be a complex field.”
On the other hand, Cisco sees changes in Web scale providers. Herren said, “Although they also have inventory to handle, we are certain that they will start increasing orders again in the second half of the year. So, the service provider is a bit mixed, but I think it may continue to have a more significant impact.”
After three quarters of strong product delivery, Cisco’s customers began to focus on installing and deploying products they purchased from suppliers.
Cisco CEO Chuck Robbins said, “The bottlenecks we previously saw in the supply chain have now shifted downstream to our customers and partners.”
As delivery volume increases, Cisco’s tracking of distributor channel inventory is also steadily decreasing. Robbins said, “Although the macro challenges we discussed still exist, we believe that the current deployment phase is the main reason for the slowdown in new orders. This is true for most of our large enterprises, service providers, and cloud clients.”
Cisco believes that this stage is temporary. Robbins said, “We estimate that customers still have 1-2 quarters of shipped orders waiting to be deployed. This has a short-term impact on our revenue outlook for the coming quarters.”
Confident about long-term prospects
Despite facing many challenges recently, Cisco remains confident in its future product growth prospects. The company expects an increase in product order growth rate in the second half of this fiscal year.
From a regional market perspective, Cisco’s overall product orders in the first quarter of fiscal year 2024 decreased by 20% year-on-year, with a 19% decrease in the Americas, a 13% decrease in EMEA (Europe, Middle East, and Africa), and a 38% decrease in the Asia Pacific region. In its customer market, service providers and cloud computing have decreased by 38%, enterprises have decreased by 26%, and the public sector has slightly increased by 2%.
Robbins said, “As we discussed, traditional service providers have always faced challenges, and these challenges still exist. We have talked about extended sales cycles and, in some cases, the need for additional signatures, which is standard. However, we believe that the situation in the second quarter did not significantly deteriorate.”
Cisco reported that as of October 28, 2023, the total revenue for the first quarter of the 2024 fiscal year was $14.7 billion, an increase of 8%, with product revenue increasing by 9% and service revenue increasing by 4%. Revenue by region is 14% growth in the Americas, unchanged in EMEA, and 3% decline in the Asia Pacific region. In terms of product revenue, Networking increased by 10%, Security increased by 4%, Observability platform increased by 21%, and Collaboration increased by 3%.