Cisco says the service provider market remains challenging 

Nov. 20, 2023
The cable and telco industry continues to impact its business into 2024. 

Cisco may be the most significant networking vendor, but it's not immune to the service provider industry's ongoing product digestion phase. 

Richard Herren, CFO of Cisco, told investors during its first-quarter earnings call that service provider challenges have been going strong for a while.  

"I would expect a service provider to continue to be difficult through the second half of the year," he said. "Within service provider, we've got both telco and cable, which has one market dynamics. I think that will continue to be a complex space."

However, Cisco is seeing movement on the web-scale provider side. 

"While they also have inventory to work their way through, we do see the line of sight to them beginning to increase their orders again in the second half of the year," Herren said. "So, service provider is a bit of a mixed bag, but I think it will continue to have probably the more significant impact." 

Focus on implementation, installation 

After seeing three-quarters of what Cisco said is strong product delivery, the company's customers are focused on installing and implementing products they purchased from the vendor. 

Chuck Robbins, CEO of Cisco, said, "The bottleneck that we previously saw in the supply chain has now shifted downstream to implementation by our customers and partners."

As deliveries rose, the channel inventory Cisco tracks at its distributors also steadily declined.

"While the macro challenges we have discussed still exist, we believe this implementation phase is the primary reason for the slowdown in new orders," Robbins said. "We saw it mostly with our larger enterprise, service provider and cloud customers."

Cisco sees this phase as temporary. "We estimate there is an additional 1 to 2 quarters' worth of shipped orders in customers' hands still waiting to be deployed," Robbins said. "This has near-term consequences for revenue and our outlook for the next few quarters."

Longer-term confidence 

Despite its near-term challenges, Cisco remains confident about its future product growth prospects. The company expects product order growth rates to increase in the second half of the fiscal year.

From a geographic perspective, year-over-year, overall product orders declined 20%, with the Americas down 19%, EMEA down 13%, and Asia Pacific down 38%. In its customer markets, service provider and the cloud was down 38%, enterprise was down 26%, and public sector was up slightly at 2%. 

"As we've discussed, the traditional service provider has been challenging, and it remains that way," Robbins said. "We've talked about an elongated sales cycle and, in some cases, the need for extra signatures, which is standard. But we didn't see it get materially worse in the quarter."

Cisco reported total revenue was $14.7 billion, up 8%, with product revenue up 9% and service revenue up 4%. Revenue by geographic segment was: Americas up 14%, EMEA flat, and Asia Pacific was down 3%. Product revenue performance reflected growth in Networking up 10%, Security up 4%, Observability up 21% and Collaboration up 3%.

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