In its fiscal Q1 2017 earnings yesterday, Cisco reported that orders from its service provider customers were down 12 percent in the quarter compared to the same time last year.
This is significant given that the service provider vertical contributes about 25 percent to Cisco’s total revenues, and the vertical contributes about 50 percent to the company’s routing business.
Cisco also blamed its weaker-than-expected guidance for next quarter on the diminished service provider spending.
“This quarter, total product orders declined 2 percent largely due to service provider orders declining 12 percent, which was worse than our expectations heading into the quarter,” said Cisco CEO Chuck Robbins on the earnings call. Later, in the question and answer portion of the call he said the company is not modeling any improvement in service provider revenues at this point.
Nevertheless, Wall Street analysts weren’t too put off by the bleak service provider forecast.
“We maintain our outperform rating on Cisco, but lower our estimates to reflect the weakness and limited visibility from the service providers’ vertical,” writes Raymond James analyst Simon Leopold in a research note today. “Despite the headwind, we continue to recommend purchase of Cisco.”
And RBC Capital Markets analyst Mitch Steves writes that although guidance is soft, it’s a good sign that the company is shifting its product mix away from lower margin businesses. “In addition, with the new Trump administration (and Republican senate) set for 2017, we think cash repatriation is now on the table,” writes Steves. “Cisco has $71 billion in cash with the majority held overseas.”
RBC is rating Cisco’s stock as “outperform” today.
The tax repatriation may be the underlying cause for optimism among Wall Street analysts. The topic certainly animated Cisco’s Chief Financial Officer Kelly Kramer on yesterday’s earnings call.
“We have talked about tax reform for a very long time, and I can say that what’s encouraging is with the incoming administration, this is one of their top priorities that they said they’re going to prioritize in their first 100 days, so we’re encouraged that something will happen now,” she said. She then enthused about the “many, many scenarios of what we would do when repatriation comes.” The company could pay off debt, increase its dividend, increase its share buyback, and increase its M&A activity, she said.