Networking equipment and software maker Cisco Systems (CSCOFree Cisco Systems Stock Report) reported in-line results for the fiscal second quarter ended January 25, 2020. However, some investors were disappointed with the company's order book, and the shares were down in response.

Total revenue came in at $12.0 billion, matching our estimate, and falling 4% year over year. Product revenue decreased 6%, while services grew its top line by 5%. The operating margin expanded 160 basis points and adjusted earnings per share of $0.77 rose 5%, surpassing our call by a penny.

Taking a look at segment performance, Infrastructure Platforms saw revenue drop 8%. The Switching subdivision experienced weakness from enterprise and data center customers, but the Catalyst 9000 and Nexus 9000 lines did show improvement. Routing was down, however, due to continued softness from service providers. The Wireless unit declined overall, but it's starting to see Wi-Fi 6 products gain some steam. Data Center revenues fell, as weakness in servers was not enough to offset gains from HyperFlex products. Meanwhile, Applications revenue dipped 8%, owing mostly to unified communications since AppDynamics continues to perform well. One of the few bright spots was Security, as sales there grew 9%.

Cisco continues to notch progress in its effort to make software a bigger part of the overall business. Indeed, Software subscriptions were 72% of total software revenue, up 7 percentage points year over year.

The company reported that it's seeing longer decision-making cycles across a number of customer segments, owing largely to global economic uncertainty and region-specific issues. Orders from the public sector were flat, while those from enterprises fell 7%. Small and mid-sized businesses purchased 4% fewer products and orders from service providers declined 11%, mostly due to an 8% decrease from the United States. It appears service providers are stalling before ramping up 5G spending later in 2020. From a regional perspective, orders from Asia fell 4%, with China down 30%. The United Kingdom has also been weak, primarily due to Brexit.

The company's fiscal third-quarter guidance is lackluster. Management expects revenue to decline 1.5% to 3.5% and earnings per share to land between $0.79 to $0.81. Our estimates are within these ranges and we are not adjusting them at this time.

We continue to expect soft demand to continue until the global economic picture brightens. Cisco's shares should rebound once evidence of this materializes. Long-term, technology transitions to the cloud, 400-gig products, 5G, and Wi-Fi 6 should support earnings growth. We continue to recommend this high-quality stock to most investors.

About The Company: Cisco Systems Incorporated is a leading provider of Internet Protocol-based networking and other products for transporting data, voice, and video across geographically dispersed local-area networks, metropolitan-area networks, and wide-area networks. Devices are primarily integrated by Cisco IOS Software and include Routers, Switches, New Products, and Other. Provides services associated with these products. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.