Cisco CFO Doesn't 'Anticipate Any Massive Revenue Impact' From Faulty Clock Components, Company Sets Aside $125M For Product Replacements

Cisco CFO Kelly Kramer said the networking giant doesn't anticipate any material revenue impact from a faulty clock component issue inside several of Cisco's popular product lines that causes the system to eventually fail.

"We've have had an issue from a supplier come out and we did book a reserve for $125 million to cover that," said Kramer, during Cisco's second fiscal quarter earnings call on Wednesday night. "We always and continue to stand by our customers through any situation like this … This is a failure rate that will happen overtime, but we're working with our customers to work through that. We're not anticipating any impact from that from a top line perspective."

When later asked to clarify if Cisco expects any type of negative revenue impact from the issue during its current third fiscal quarter, Kramer said, "Not as of right now."

"We're working very proactively with our customers, in terms of how quickly and where they want to do their replacement. So we're working very closely [with them] but as of right now, we have not seen and don't anticipate any massive revenue impact from this," she said.

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[Related: Partners Expect Potential Customer Downtime, Months-Long Resource Drain From Cisco Product Replacement Effort]

The faulty clock signal component issue, which Cisco disclosed on Feb. 2, causes some of Cisco's most popular product lines – namely Nexus switches, ASA firewalls, ISR routers and Meraki cloud managed switches – to fail after 18 months in production. Cisco said it expects a noticeable increase in product failures after three years of runtime.

Cisco CEO Chuck Robbins did not comment on the matter during the company's earnings call.

Net income from Cisco's second quarter included a pre-tax charge to product cost of sales of $125 million related to the expected remediation costs for anticipated failures from the clock-signal component issue from a third party vendor, according to Cisco.

Other vendors such as Juniper Networks and Hewlett Packard Enterprise recently announced that some of their products are affected as well with the faulty clock signal component. HPE, Juniper and Cisco have all declined to identify the manufacturer. The issue some have speculated could be a result of a faulty Intel C2000 Atom processor. Intel in January notified OEMs of Atom processor C2000 issues in a 37 page specification update.

For its second fiscal quarter, which ended Jan. 28, Cisco reported revenue of $11.6 billion, down 2 percent from $11.8 billion a year ago.

Cisco slightly beat Wall Street analysts' earnings per share expectations of 56 cents on revenues of $11.58 billion. Cisco's Non-GAAP net income declined 2 percent to $2.9 billion, or 57 cents per share.

The shining star for Cisco during the quarter continued to be its security business which grew 14 percent year-over-year to $528 million. This was Cisco's fifth consecutive quarter of double-digit growth in security.

Robbins said deferred security revenue grew 45 percent during the quarter, "reflecting the strength of our best-of-breed offerings and architectural approach to security from the network to the endpoint to the cloud."

The CEO said Cisco added more than 6,000 new Advanced Malware Protection (AMP) customers during the quarter as well as over 5,500 firewalls customers, bringing the total AMP customers to 29,000 and firewalls customers to 67,500.

"Cisco is leading the market in delivering innovative cloud-based security solutions," Robbins said.

The networking giant's bread-and-butter switching and router business took a hit during the quarter. Cisco's switching revenues fell 5 percent to $3.3 billion, while its routing business dropped 10 percent to $1.8 billion, compared to the same quarter a year ago.

"Switching declined five percent driven by weakness in campus partially offset by strength in the ACI portfolio, which was up 28 percent," said Kramer. "Routing was down ten percent, although we did see growth in orders."

Overall, it was a mixed result for Cisco regarding specific market segments for its second quarter.

The vendor's collaboration business increased 4 percent year-over-year to $1.06 billion, while wireless revenue also jumped 3 percent to $632 million compared to one year ago. Cisco's data center business declined 4 percent to $790 million year over year.

Deferred revenue w as $17.1 billion, up 13 percent in total, with deferred product revenue up 19 percent, driven largely by subscription-based and software offerings, according to Cisco. Deferred service revenue was up 9 percent. The portion of product deferred revenue related to recurring software and subscription businesses grew 51 percent.

"The differed revenue from our subscription and software business is indicative of the [software] transition that you should continue to expect from us," said Robbins.

Cisco will report its third fiscal quarter results on May 17.