Cisco Cuts Long-Term Growth Outlook, But Says 'Big Deals Are Back'

Cisco shares dipped more than 2 percent Thursday afternoon after the networking giant lowered its long-term revenue growth outlook, citing continued weakness in its emerging markets and service provider business but stressing a healthy U.S. enterprise pipeline.

"We clearly understand your frustrations with our Q1 and Q2," said Cisco CEO John Chambers, speaking Thursday at Cisco's annual financial analyst event. "But it is an exception, in our opinion, and an aberration in terms of what is going to occur."

Cisco said it expects its revenue to grow between 3 percent and 6 percent throughout the next three to five years, a figure that is lower than the original 5 percent to 7 percent long-term outlook the company gave last year.

Cisco's slashed long-term outlook comes just a month after the San Jose, Calif.-based company warned investors that it expects revenue for its current second fiscal quarter to slide between 8 percent and 10 percent. Sluggishness within emerging markets and the service provider segment were again attributed to the drop.

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In its first fiscal quarter, Cisco's emerging markets revenue was down 12 percent year over year, with the total revenue from its top five emerging market countries -- Brazil, Mexico, India, China and Russia -- declining an even greater 21 percent.

In its service provider business, Cisco's first-quarter revenue was down 13 percent year over year, a decline Chambers attributed in part to Cisco's struggling set-top box business -- which separately saw revenue drop 20 percent year over year -- and to "slower growth than anticipated" around new service provider platforms such as Cisco Network Convergence Systems.

Chambers said Cisco is mapping out a plan to revive these sluggish segments. For service providers, he said, Cisco is shifting to more of an architectural play, selling service providers not on one-off products but on broader architectures and the operational expenditure savings they drive.

"What has changed is our ability to, instead of selling [service providers] routers or franchises on mobility or other issues, focus on their opex and capex," Chambers said, adding, "Are you going to bet your future, as a service provider, on a Juniper, Alcatel or Huawei? That's a battle we should win almost every time."

In emerging markets, Chambers said Cisco plans to stay "extremely committed," increasing its headcount and sales coverage in emerging countries between 5 percent and 6 percent. He said the 11 percent drop Cisco saw in its emerging markets business in its first quarter was largely because of macroeconomic issues.

But, as its footprint expands, Cisco expects its emerging markets business to grow between 6 percent and 10 percent annually, with "all the appropriate caveats," Chambers said.

NEXT: U.S Enterprise, ACI Are Cisco Bright Spots

Despite the challenges it faces in its service provider and emerging markets segments, Cisco is seeing a significant bounce-back in its U.S. enterprise business, Chambers said, along with a healthy pipeline for its Application-Centric Infrastructure (ACI), the fabric-based data center architecture, and Cisco's flagship technology for software-defined networking, launched last month.

"The U.S. enterprise pipeline in $1 million deals, $2 million deals and $5 million deals was up well over 20 percent in each category," Chambers said of Cisco's first fiscal quarter, and moving into the second quarter. "The big deals are back."

Chambers attributed this to Cisco channel partners, and to the company's focus on selling into the business, not just IT.

Meanwhile, Chambers said Cisco, which he referred to as the "logical leader" in the SDN space, is starting to see an uptick in customer interest around ACI and the new Nexus 9000 switching line that supports it. Chambers said Cisco has built up 305 "serious customers" in its ACI pipeline since the product launch five weeks ago, with three of those deals ranging between $40 million and $100 million in value. He also said those customers vary in terms of geography, size and type.

"You watch how quickly we ramp up in terms of opportunities in this market," Chamber said.

Kent MacDonald, vice president of converged infrastructure at solution provider and Cisco Gold Partner Long View Systems, said most of his customers are still early on in their SDN deployments, but that many already have expressed an interest in ACI.

"We are still in the early days, but it is getting much more real in regard to our account engagement and talking about ACI and where the Nexus 9000 plays. It has been a positive reception," MacDonald told CRN. "I would say in 2014 we will start seeing the financial benefits and network benefits of that technology."