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Cisco Earnings Suffer From Carrier Weakness

Mitch Wagner
5/14/2014
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Weak carrier business continues to drag down Cisco's revenue, but that sector is improving, and future growth will be driven by the cloud, the Internet of Everything, and other new technologies and markets, the company said in its fiscal third-quarter earnings call Wednesday.

Cisco reported third-quarter revenue which it said demonstrated "solid execution." For the quarter that ended April 26, the company reported revenue of $11.5 billion and a profit of $2.2 billion, or $0.42 per share. The 5.5% decline in revenue from a year earlier was lower than expected. Wall Street on average had expected revenue of $11.36 billion.

In the same quarter last year, Cisco posted revenue of $12.2 billion and a net profit of $2.5 billion.

"Our financial results exceeded the guidance we provided last quarter as we demonstrated clear progression returning to growth," John Chambers, Cisco's chairman and CEO, said in a press release.

The service provider market is an area where the company is having problems "both macro and Cisco specific," Chambers said during the call. "Service provider orders were down 5%, showing improvement from the 12% decline in Q2 and 13% decline in Q1." Weakness in emerging markets hurt the service provider market. Also, service provider video revenue declined 26%, and orders declined 11%.

"We are seeing some signs of stabilization in the SP business but believe it will take multiple quarters to return to growth," Chambers said. "We will continue to make changes we need to to lead in the service provider market."

He highlighted two industry and Cisco transitions that will drive future growth: the cloud and the Internet of Everything. This past quarter, Cisco announced its Intercloud strategy, which it calls the first global open network of clouds. Previously announced partners include Telstra Corp. Ltd. (ASX: TLS; NZK: TLS). Cisco plans to make more announcements at its Cisco Live conference next week, including two new public cloud partners. (See Cisco's Cloud Bet: What's in It for SPs? and Can Cisco Help SPs Offer Cloud-based Apps?)

The company's Meraki cloud networking business grew more than 150%, with the customer count growing about 30% from the fiscal second quarter, Chambers said.

On the Internet of Everything, Cisco customers, including Royal Dutch Shell and The Weather Channel, will present at Cisco Live on the heels of the departure of Guido Jouret, the company's vice president and general manager heading its Internet of Everything initiative. (See Cisco's IoT Leader Finds Other Things to Do.)

Chambers singled out SDN as an area for growth. The company will "not only embrace SDN and benefit from it, but we're going to lead in SDN." Cisco will embed its Application Centric Infrastructure in the cloud, data center, LAN, and edge network. (See Defining SDN & NFV, The Three Faces of SDN, and Cisco's ACI Gets Physical With SDN.)

Another area where Cisco faces stiff competition is in its Unified Computing System. But that competition isn't coming from IBM Corp. (NYSE: IBM), HP Inc. (NYSE: HPQ), and Dell Technologies (Nasdaq: DELL), Chambers said. Cisco is seeing 29% growth in its server business, compared with negative growth for the other three companies combined. The major competition, he said, is white labels.

"We're going to sell architectures in the white label approach, as opposed to standalone products," he said. "I personally believe standalone products from any company, whether a standalone switch or a standalone server, will get squeezed pretty hard."

Chambers expects a return to growth to take time. "It will probably be a little bit bumpy. It won't be just one quarter you finally turn the corner, and the next quarter you're there," he said. "We are very pleased with this quarter. Next quarter is set up pretty well. But we've got some really heavy lifting to do, and I'm sure a couple of bumps along the way, especially in emerging markets and service providers."

For the fourth quarter, Cisco expects total revenue to decline up to 3% or rise up to 1% from a year earlier.

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Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
5/17/2014 | 4:33:24 PM
Re: Only in PR-land
To be fair, the profit decline is slowing. And Cisco seems to be making the transition to software-defined networking. 

They're right about one thing: Vendors that can offer a complete portfolio of hardware, software, and services will dominate this market. Particularly if those companies can assemble solutions based on products from multple vendors. 

And the whole thing is going to cloud-based networking in the long run. 
danielcawrey
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danielcawrey,
User Rank: Light Sabre
5/15/2014 | 11:31:16 PM
Re: Only in PR-land
I would think that Cisco has more potential in SDN rather than in any sort of cloud offering.

But it's smart to stay diverse: Whether it comes down to unified communications, cloud computing or software defined networking, if Cisco has its hands in each area it will find ways to make sales. 
DOShea
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DOShea,
User Rank: Blogger
5/15/2014 | 9:54:48 PM
Re: Only in PR-land
A lot of Chambers' comments sound like more of the same from the last two or three quarters, which I guess means there is no new thinking about how to address what could be a changing service provider market.
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
5/15/2014 | 1:18:35 PM
Only in PR-land
Only in PR-land does declining revenue and profits get described as "solid execution." 

"We're bleeding less than we were last quarter!" 

 
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