Business Transformation

Cisco Busts Slump Despite Carrier Slowdown

Cisco has broken its revenue decline, reporting fiscal first-quarter 2015 revenue Wednesday of $12.2 billion, up 1% year-over-year. That's the good news.

The bad news: Revenue from carriers was down 10%. And income fell 8.4% year-over-year to $1.8 billion, or 35 cents per share.

Chairman and CEO John Chambers declared in a statement that Cisco Systems Inc. (Nasdaq: CSCO) is "pleased" with the results and "very comfortable" with the company's strategy for the "next generation of IT and the Internet of Everything." This was Cisco's strongest Q1 ever in revenue, non-GAAP operating income and non-GAAP EPS, Chambers said.

Cisco is making "progress towards becoming the #1 IT company in the world," Chambers said in the statement. "We are still in a tough environment, but seeing encouraging trends as cities, businesses, governments and schools are becoming more digitized."

The pace of technology change is proving advantageous to Cisco. "The role of the network is at the center of every technology and business transition," Chambers said. Customers are no longer interested in assembling technologies from different pieces. "Solutions need to be based on integrated architectures combined with intelligent networks," Chambers said.

Cisco competitors Alcatel-Lucent (NYSE: ALU) and Brocade Communications Systems Inc. (Nasdaq: BRCD) see things differently from Chambers. Alcatel-Lucent sees a powerful advantage in allowing customers to pick best-of-breed technologies, while Brocade touts the advantage of using open standards and open source to avoid vendor lock-in. (See AlcaLu's Combes: 'We Are Now Back on Track' and Brocade Wants to Be Red Hat of OpenDaylight.)

Cisco also announced a new CFO: Kelly A. Kramer will replace Frank Calderoni, who said he is stepping down effective January 1. Kramer is currently senior VP of business technology and operations finance for Cisco.

Shifting winds
Previously, Chambers had said Cisco had three "headwinds" impeding growth: emerging markets, the service provider market and product transitions. That third area, in high-end switching and routing, has become a tailwind, driving growth, Chambers said.

Cisco is seeing the payoff from a 2011 plan to transform the company from a model of selling "boxes and standalone services" to selling integrated solutions and services "that lead to business outcomes," Chambers said on the call.

Cisco anticipates 4% to 7% revenue growth in the second quarter -- a conservative position based on the predictions of reduced spending for "several large service providers," Chambers said.

And that leads to the gloomy corner of the party: Service provider revenue declined globally for Cisco by 10%. Carriers are reducing spending on capex, Chambers noted, citing AT&T Inc. (NYSE: T) as an example. But even in the carrier market, the news wasn't all bad, as Cisco anticipates it's well-positioned to take advantage of the market when it turns around, partnering with carriers to navigate their own business problems. To achieve the goal of being more responsive to customers, Cisco reorganized its own business, including engineering. "We are nicely positioned for a rebound in service providers when it happens," Chambers said. (See Troubled Cisco Looks to 'Bust Silos' .)

When will that turnaround happen? "Let's assume it won't change in a couple of quarters," Chambers said.

And it could take even longer. Chambers warned that a net neutrality proposal to classify broadband service providers as Title II common carriers would further slow service provider investment. (See Cisco's Chambers: Title II Net Neutrality Talk Already Hurting.)

Until the carrier turnaround, Cisco is working to build carrier relationships at every level of the customer, to help carriers solve their business problems, including video, services and transport commoditization.

Service provider video revenue fell 12% year-over-year for Cisco, to $870 million. In particular, the set-top box business is taking a hit; the decline in service provider revenue would be only 6% if not for the lost sales due to set-top boxes.

"I am not wed to set-top boxes," Chambers said. "I am wed to winning the battle for video in the cloud." Set-top boxes are a means to that end.

The slowdown in carrier spending is hitting hard across networking vendors. A10 Networks Inc. , Juniper Networks Inc. (NYSE: JNPR), Spirent Communications plc , EZchip Technologies Ltd. (Nasdaq: EZCH) and Adtran Inc. (Nasdaq: ADTN) are all taking hits, while Infinera Corp. (Nasdaq: INFN) and Ericsson AB (Nasdaq: ERIC) did well. And Juniper has problems other than carrier demand. (See Turmoil at Juniper as CEO Quits, Arista's Q3: Smooth Not Lumpy With the Cloud Titans and A10 Latest Victim of Carrier Spend Slowdown.)

Software-defined networking has emerged as a strength for Cisco. "A year ago, we were fighting an SDN perception battle with computers using PowerPoints instead of products," Chambers said. Now, Cisco is succeeding with leading SDN products and strategy.

SDN is potentially a threat for Cisco; by divorcing the control plane from the data plane, vendors might see less demand for the expensive, proprietary equipment that's historically driven Cisco's bottom line. In reality, that hasn't proven to be the case -- Chambers said switching growth margins have been "incredibly consistent."

Cisco reduced headcount by nearly 3,000 year-over-year and about 1,800 people over the quarter, to 72,247.

Find out more about how businesses are reinventing themselves for the changing market on Light Reading's business transformation channel.

At Cisco's last quarterly call in August, the company reported annual revenue of $47.1 billion, down 3%, and barely halted three quarters of revenue decline, with $12.4 billion quarterly revenue, flat year-over-year. Cisco said at the time it planned to lay off up to 6,000 people. (See Cisco to Ax Up to 6,000 Jobs, But It's Excited About SDN.)

The current 1% quarterly revenue growth matches guidance Cisco gave on the previous quarterly earnings call in August.

Cisco traded at $24.71, down 1.59%, after-hours on Wednesday.

— Mitch Wagner, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profileFollow me on Facebook, West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected]

kq4ym 11/14/2014 | 8:31:11 AM
Income and Revenue I'm not sure I'd be pleased with a 1% increase in revenue while my profits went down in double digits. Cisco is still scrambling I'm guessing to make sense of a rapidly changing climate, and narrow down just where to put its business plan emphasis.
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