Cisco Has Strong Quarter Despite Drops in Switch, Data Center Spending

Cisco Systems officials were able to pull together a strong financial second quarter despite strong competition and a volatile global economic environment while at the same time continuing to rapidly evolve its business model.

The company on Feb. 10 announced that during the last fiscal quarter, revenue jumped 2 percent over the same period in 2014, to $11.8 billion, while net income, at $2.9 billion, increased 8 percent.

This was accomplished despite a microeconomic picture and instability in the global markets that hurt sales in some of Cisco’s business areas, including network switches—particularly in its campus business—and the data center.

Cisco results

However, Cisco saw strong growth in other areas, including routing, collaboration, security, service provider video and its cloud-based businesses, according to CEO Chuck Robbins. The fact that Cisco was able to offset slowdowns in some of its key businesses with growth in several newer areas is an indication that its efforts over the past several years to expand beyond its networking roots into a wide range of areas—including the Internet of things (IoT), security, collaboration and the cloud—is taking hold.

It’s an initiative that Cisco is pursing both through in-house development as well as an aggressive acquisition strategy. Most recently, the company last week announced it is buying Jasper Technologies for $1.4 billion, a move officials said will enable Cisco to offer customers a more complete IoT portfolio.

“Our portfolio is more strategic than ever to companies and countries that are digitizing everything,” Robbins said during a conference call with analysts and journalists. “As billions of things become connected, creating massive amounts of data, Cisco is playing an increasingly critical role, enabling our customers to drive their priorities with industry-leading security.

End to end approach

“Cisco is unique in our ability to connect everything for our customers, from the sensor to the data center, with security and analytics. As a result, our conversations are no longer just in IT. They have become prevalent in the C-suite and the boardroom.”

The volatility in the global markets in January impacted the final numbers from the quarter, according to Robbins. Economic struggles in China had a ripple effect through markets worldwide, causing many enterprise customers to slow their spending on some technologies, such as switching products in for their campus environments. However, there were other areas where they continued to focus on.

“What we saw was that our customers were spending in areas that are incredibly mission-critical for them even in these times where there’s uncertainty,” the CEO said. “So you see them continuing to spend in security. You see them continuing to spend in the next-generation data center evolution, which was indicative of the 100 percent growth we saw in that portion of our portfolio.”

However, where customers “had the option to wait, they chose to wait a bit. I don’t see any fundamental issues relative to the enterprise portfolio or things like that. I think that it was largely just a prioritization effort that we saw within our customer base on the enterprise side.”

The slowdown in campus networking spending helped drive a 4 percent revenue decline in Cisco’s switching business. However, despite the overall drop, Robbins said the company continued to see strong growth in its Application Centric Infrastructure (ACI) business, which essentially is Cisco’s answer to software-defined networking (SDN).

The two-year-old business has reached a $2 billion run rate, growing more than 100 percent during the quarter, he said. In addition, the company is pushing its efforts in the transition to 10 Gigabit Ethernet, 40GbE and 100GbE.

Data centre

The overall data center business declined 3 percent, also impacted by a slowdown in customer spending, according to Kelly Kramer, executive vice president and CFO. In addition, in same period the previous year, the business saw a 40 percent increase, which made for a difficult comparison.

Other businesses saw growth, including collaboration, which increased 3 percent, helped by 17 percent growth in the WebEx. Video grew 37 percent, while the security business rose 11 percent.

Robbins also said the company continues to grow its cloud- and software-based offerings, including WebEx, security and Meraki cloud networking. Deferred revenue grew to $15.2 billion, an increase of 8 percent. Deferred product revenue increased 11 percent, while deferred service revenue grew 7 percent.

“You are seeing us move more of our portfolio to be delivered in both on-premise and cloud-based models, and we are aggressively driving this transition,” he said.

Cisco will continue cloud-enabling its portfolio to meet customer demand for software-as-a-service (SaaS) and subscription offerings, according to Patrick Filkins, a research analyst with Technology Business Research.

“Faced with mounting pressure from competitors and customers alike, Cisco is taking steps to evolve and reduce its reliance on network infrastructure sales,” Filkins wrote in a research note, pointing to the growing number of products the company is making available through the cloud.

“Cisco has not ruled out employing a similar strategy with its network infrastructure. As the software in routers and switches is increasingly emphasized due to hardware commoditization and the threat of white-box hardware, Cisco is likely to offer its networking software via subscription in the next several years.”

Cisco expects revenue during the current quarter to grow 1 percent to 4 percent.

Originally published on eWeek.