Cisco shares fall as results fuel doubts

Chuck Robbins was a continuity pick when he took over as CEO of Cisco Systems (CSCO) in July, and Cisco investors still have the same concerns and fears they've had for a while now -- concerns and fears that only grew stronger after Thursday's quarterly earnings report.

Cisco shares, which had been unchanged for the year, initially dropped about 3% after hours on the report and are trading off 5% in pre-market dealing on Friday.

The questions for Robbins and his team haven't changed from those that faced former CEO John Chambers the past few years. Are Cisco customers dumping their own data centers to move more and more computing to cloud providers like Amazon (AMZN) and Microsoft (MSFT) and, for whatever needs they still have, are they going to turn to commodity, open-source gear over the kinds of proprietary networking equipment that Cisco sells most profitably?

The bears found more evidence for both issues in Thursday's report, even though Cisco slightly beat analyst expectations. Adjusted earnings per share of 59 cents exceeded the 56 cents expected and revenue of $12.68 billion just nipped the $12.65 billion expected for the quarter, Cisco's fiscal first quarter of 2016.

Most importantly, Cisco said it would grow sales zero to 2% next quarter versus the 5% expansion analysts expected, offering only the vague and unhelpful explanation that "uncertainty" about the macro economic environment & currency trends was delaying some purchasing decisions. Robbins promised better results later in fiscal 2016. "We feel like we’re really well positioned for the second half of the year," he said on a call with analysts.

But an obvious alternate explanation could be that more big customers are turning to the cloud at a faster rate than previously expected, so they aren't ordering as much equipment from Cisco. That seems like what some big companies have been saying lately.

Robbins and CFO Kelly Kramer took pains to deny it. "That is one of the overhangs that we have on our valuation -- is that going to eat our lunch," Kramer told Yahoo Finance in an interview on Thursday night. "We're not seeing it."

Kramer said she carefully monitors Cisco's sales trends among its thousands of small and medium sized business customers to get an early warning on potentially increasing reliance on cloud services. In theory, those types of customers, with simpler needs, would transition to the cloud more quickly than larger customers with bigger data centers. "It's like my strongest segment," Kramer says.

Another Cisco problem was weakness in the just completed quarter in routers, a segment where Cisco has new products and should be gaining sales momentum. That's the company's second-largest segment by revenue and one that's under attack from cheaper, open-source competition. Sales declined 8% from a year ago, after increasing at a 3% rate the previous quarter. CEO Robbins called it a "timing issue" and said Cisco would have some snazzy, new products to announce in the area soon.

Finally, like other aging tech giants, Cisco has talked a lot about becoming faster and more agile in order to strike off in new directions more poised to benefit from the mobile-oriented and cloud-oriented market trends. And, like the others, it still had little to show for its efforts so far.

A mobile partnership with Apple (AAPL) announced in August won't show up in results for a while, Robbins and Kramer say. Deals with Ericsson (ERIC) and Chinese supplier Inspur Group could help boost cross-sales of traditional Cisco equipment more quickly but aren't game changers in the same way. And Cisco's own nascent cloud subscription software efforts in security, communications and other areas, while growing fast, still made up only about 5% to 6% of Cisco's revenue in the quarter. "That's been growing 20% to 30% for many quarters now," Kramer says. "It will take us a while."

It would be crazy to think that Robbins, a longtime Cisco veteran who worked closely with his former boss, could instantaneously quell all the concerns that have swirled around the company for years. But, unfortunately for Robbins and his team, Thursday's report did the opposite, emphasizing those long-term concerns that could take the Robbins-Chambers strategy down.

"I am more optimistic than ever about Cisco’s future," Robbins said at the end of his call with the analysts. "For me, nothing has changed about how I feel about the business."

Now he only needs to convince investors.