Cisco CEO Looks Ahead To Intuitive Network And Innovation Cycle Impact As Sales Fall In Q4

Cisco stayed ahead of Wall Street's expectations for its fourth fiscal quarter 2017, but the router maker recorded a $400 million drop in net income as routing and switching revenues dropped 9 percent.

Cisco CFO Kelly Kramer also said the sales drop won't slow the company down financially; it will continue to buy and build.

"We have $3 billion of cash domestically … and we've been able to get access to capital to take out debt if we need to as we go forward because we are continuing to ensure we have the flexibility we need, whether it's for strategic M&A or to continue with our dividend or share repurchase," said Kramer, during the company's earnings call on Wednesday.

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Cisco CEO Chuck Robbins (pictured) said the vendor's networking sales drop was due to a "pause" in customers spending after the company launched its Intuitive Network platform in June. "If you think about our guidance last quarter, we anticipated this," Robbins said.

"We also knew at the time that we were going to be making the announcement in June of the new platform, so we anticipated this result. Anytime we do a major platform announcing, particularly in switching, there is a period of time where our customers pause because they want to understand what this means. We did see a pause," said Robbins.

The CEO said in the final four weeks of Cisco's fourth quarter following the launch that 200 customers purchased the new Catalyst 9000 platform.

"The great majority of them also opted for the advanced software subscription that goes on top of it. We've had a lot of conversations over the last two years as to whether we can really drive a subscription business on our core switching platforms and what we see is, at the least early indications are, that we can do that," said Robbins.

Cisco's net income fell to $2.4 billion, or 48 cents per share, from $2.8 billion, or 56 cents per share compared to the same quarter one year ago. Kramer said the drop was due to the rising cost of memory parts, such as dynamic random-access memory (DRAM) prices, and said she expected that to continue to affect Cisco profits in the near term.

"We've talked about memory for the last three quarters. We started to see this as a headwind initially in Q2, it's gotten progressively worse. The prices continue to climb, she said.

Cisco's security business grew 3 percent year over year to $558 million; Cisco had seen double-digit or nearly double-digit security gains over the past several quarters. Robbins said he has "zero concerns" about the slowed security growth during the quarter.

"This is a revenue timing issue," Robbins said. "We saw some of the strongest [security] order growth in the quarter as we've seen in the last years. It's simply a revenue timing issue ... the strength in the business, I'm still comfortable with."

Overall, the San Jose, Calif.-based network leader reported revenues of $12.1 billion for the quarter, 61 cents per share, down 4 percent year-over-year. Wall Street expected the company would generate $12.07 billion in revenue or 60 cents per share.

Cisco's switching revenue dropped 9 percent to $3.44 billion, while routing also fell 9 percent to $1.89 billion, compared to the same quarter one year ago.

Collaboration sales fell 3 percent to $1.11 billion year over year, while Cisco's data center business dropped 4 percent to $837 million. Other than security, Cisco's only other segment growth was its wireless business, which grew 5 percent to $799 million.

For Cisco's current first fiscal quarter 2018, the company is expecting a revenue drop of between 1 percent to 3 percent year over year. Robbins said one of the key messages he wants to get across is that Cisco's innovation engine is roaring and that its Intuitive Network platform is just the beginning.

"This launch that we announced about eight weeks ago was the first of what I believe you should expect from us in just an ongoing cycle of innovation," said Robbins. "I said when I took this job that we were going to increase the pace of innovation and this is the first wave of what you're going to see coming from us."

Cisco is scheduled to report its first quarter 2018 earnings on November 15.