Cisco Struggling With Service Providers

Cisco (NASDAQ: CSCO) reported 1Q FY17 results after the market close on November 15, and the numbers weren't that exciting. Consolidated revenue was up 1% YoY, driven by growth in security and other SaaS businesses in Cisco's portfolio.

Yet, the big blemish on the report, was service provider revenue sliding 12% YoY. And the company doesn't expect it to get much better, in fact CEO Chuck Robins indicated the company is not modeling for any improvement in 2Q FY17. Given the service provider segment comprises 25% of Cisco's total business, a 12% haircut is meaningful to the enterprise as a whole. To that point, Cisco guided to a 2-4% decline in revenue YoY for 2Q FY17.

The answers provided on the earnings call weren't that satisfying in light of what is happening in the telecom market. Mr. Robins called out political uncertainty, Fx fluctuations and service providers delaying purchasing decisions to manage their own EPS.

This all feels like one huge misdirection play by legacy vendors. It is clear listening to earnings calls from players who are winning in the telecom market, and they aren't discussing a decline in capex spending. Quite to the contrary. Vendors like Gigamon (NASDAQ: GIMO), RADCOM (NASDAQ: RDCM) and AMDOCS (NASDAQ: DOX) are pointing to a change in purchasing behavior from legacy hardware solutions to cloud-native software solutions.

Based on my research, CSP capex spend isn't declining as much as it is being redirected to new players.

The continued redirection of spending of course will continue to manifest itself in the earnings reports of telecom vendors in the quarters and years ahead. I'm expecting a big reallocation of market cap between the legacy players and the new kids on the block as Wall Street begins to figure out what is happening under the hood.

Disclosure: I own RDCM shares.