Cisco Systems, Growing Pains from Business Model Changes

[Asia Economy Reporter Eunmo Koo] Cisco Systems is experiencing growing pains due to its business model transformation. While the change in business model is positive, there are concerns that a conservative approach is necessary amid intensified competition in the router and switch markets.

According to Samsung Securities on the 15th, Cisco reported revenue of $12.01 billion for the second quarter of fiscal year 2020 (October to December 2019), a 3.5% decrease compared to the same period last year, and earnings per share (EPS) of $0.77, meeting market expectations of $12 billion and $0.76 respectively. By region, North America recorded $7.01 billion in revenue and Europe $3.13 billion, down 4.6% and 2.8% year-over-year respectively. In the product segment, sales to enterprises and service providers declined by 7% and 11%, respectively, serving as the main factors behind the revenue decrease.

Analysis indicates that the core business continues to deteriorate. On the same day, Samsung Securities analyst Cheolmin Kim stated in a report, “Competition is intensifying in the core router and switch markets with companies such as Arista Networks and Juniper Networks,” adding, “With uncertain prospects for maintaining market share, the guidance for the third quarter of this year also forecasts a revenue decline of about 2%.”

Growing pains from the business model shift are expected to continue. Analyst Kim noted, “It is encouraging that 72% of software revenue comes from subscription sales, indicating a shift to a subscription-based business model,” but added, “Although the US-China trade dispute has reached a preliminary agreement, uncertainty remains, and with COVID-19 increasing uncertainty in the first half of the year, it is still premature for Cisco’s investments in Silicon One, the Cisco 8000 series, and optical technology?introduced as part of its future internet strategy last December?to show tangible results.” He further emphasized, “In the short term, attention should be paid to the continued decline in sales in the infrastructure platform segment, which is Cisco’s main business and a key driver of corporate revenue.”

Currently, Cisco’s trailing twelve-month dividend yield stands at 2.8%, higher than the S&P 500 IT index’s 1.2%. Analyst Kim advised, “Approaching from a dividend perspective is valid, but a conservative stance is necessary until an increase in subscription revenue or a recovery in market share for key products such as routers and switches is confirmed.”

This content was produced with the assistance of AI translation services.