5 Things To Know About Cisco's Bleak Second-Quarter Forecast

Rough Times Ahead

During its first-quarter earnings call last week, Cisco CEO Chuck Robbins reported revenue guidance for its second quarter of only 0 percent to 2 percent, which caused the networking leader's stock to tumble nearly 5 percent in after-hours trading.

The San Jose, Calif.-based company also reported some declining areas that had Wall Street analysts on the earnings call raise some red flags, such as an 8 percent drop in its core routing business and a 3 percent decline in the enterprise. Here are five things channel partners should know about Cisco's bleak second-quarter guidance.

Bleak Q2 Outlook

CEO Chuck Robbins' second quarter guidance of revenue growth of only 0 percent to 2 percent, with earnings per share at just $0.53 to $0.55, overshadowed its overall successful first-quarter earnings.

"It certainly was the rain on Cisco's parade," said one top executive solution provider and Cisco Gold partner who declined to be identified. "Everybody thought it was going to be more around the 3 [percent] to 5 percent guidance. … Obviously, there's no need to panic, but if they truly do have zero percent growth [in the second quarter], then that's something we'll need to take a harder look at."

Zeus Kerravala, principal analyst at Westminster, Mass.-based ZK Research, said it is still unknown if Robbins' guidance is conservative.

"The thing we don't know about Chuck is that [former CEO John] Chambers was historically a very conservative guider and we don't know if Robbins has taken a similar approach," said Kerravala.

Cisco's second-quarter earnings report is set for Feb. 10.

Enterprise Down 3 Percent

The networking leader's enterprise business fell 3 percent from the year-before quarter because of uncertainty from macro challenges outside the U.S., according to Robbins. He said Cisco saw "weakness" particularly in Asia-Pacific as well as in Canada and Latin America.

Kerravala said Cisco is going up against larger competitors in the enterprise in 2015 compared with a few years ago.

"Cisco in the networking space had a free ride for a while," said Kerravala. "Because of cloud and all this transition in the data center, we're moving more toward a market with more vertically integrated stacks. Cisco, Dell, IBM, HP and Oracle all have these integrated stacks, and so it's becoming this different competitive landscape. There's net fewer competitors, but the ones they have [are] bigger, and certainly have more marketing and stronger sales execution than the ones Cisco dealt with in the past."

Routing Slumps 8 Percent

Cisco's bread-and-butter routing business declined a sharp 8 percent for the quarter, to $1.8 billion. Kerravala said he believes the drop is because of a lack of growth in the service provider business.

"Service providers are still trying to figure out their cloud strategy and, on paper, cloud will be good for routing. The question is, when does that trend start?" said Kerravala. "From a partner perspective, patience is going to be required to wait out some of the [slowness] or weaknesses we're seeing now."

Robbins said he does expect Cisco's routing business to "bounce back" and that the networking giant will have some new introductions coming out this month in the space.

Single-Digit Security Growth

Cisco has been more upbeat about its push into the security market this year than about any other spaces. Although its security business grew 7 percent, to $485 million, in the quarter, Cisco is competing with fast-growing security specialists such as Palo Alto Networks, which in its most recent quarter reported a 60 percent growth in sales, to $284 million, from the year before.

"I'm OK with that type of growth for now, but would want that number in the double digits by the end of fiscal year," said the Cisco Gold partner. "Seven percent is OK for now. … The deferred security grew 31 percent -- that means they're probably just going to keep going up and up."

Kerravala said Cisco is in the midst of a transition from security product sales to deferred revenue that may take a few years before the whole picture becomes clear.

"It creates a lag in bookings, because if you're deferring revenue … two or three years, versus collecting it all up front, it creates a bit of a revenue hiccup," said Kerravala. "When Citrix did it, it was two to three years before Wall Street finally understood the implications of that. … It's something [partners] need to think about."

Stock Tumble

Cisco's stock took one of the biggest hits this year in after-hours trading after its first-quarter earnings report, plummeting nearly 5 percent. Its market capitalization fell from $140.9 billion Nov. 12 to $132.6 billion Nov. 13, the day after the earnings report.

The Cisco Gold partner said Cisco shares are inexpensive and investors have a short-term focus, compared with channel partners' long-term vision.

Robbins said he is "more optimistic than ever in Cisco's future."

"Yes, the guidance we just gave for Q2 is lower than what the market expected, and I don't take that lightly, but for me, nothing has changed in how I feel about the business," Robbins said during the earnings call. "We're moving incredibly fast and doing all the right things to drive our growth and strategic relevance. We expect the results of these moves will start showing up in the coming quarters."