Despite some restructuring and re-tooling, Cisco's service provider video business remains in the dumps.
In the latest earnings results, Cisco Systems Inc. (Nasdaq: CSCO) reported late Wednesday that its service provider segment revenues declined 11% on a year-on-year basis in its fiscal fourth quarter, which ended July 26. Service provider video contributed heavily to that decline, with video orders dropping 13% from a year ago and video revenues falling 10% to $1.06 billion.
Likewise, for all of fiscal 2014, Cisco reported a 15% decline in service provider video revenue. Although video software revenues rose for the year, video infrastructure revenue plummeted, pulling down the entire segment.
Cisco's slumping service provider results stand in stark contrast to the steady gains registered by Arris Group Inc. (Nasdaq: ARRS), its biggest rival in that segment. In its latest earnings report two weeks ago, Arris posted strong revenue and income increases, thanks at least partly to higher shipments of cable and IPTV set-tops, home video gateways and other video-related equipment. (See Arris Rides Capex Wave Again.)
Cisco senior executives blamed the latest service provider business declines on the pending mergers of such major cable customers as Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC). Cisco Chairman and CEO John Chambers stressed that the service provider sector has seen about as much consolidation activity in the past 12 months as in the preceding four years combined.
Chambers also noted that service providers are struggling with their business models right now as they make the transition to a new competitive landscape. As a result, he said, they are putting "the squeeze on vendors."
With the Comcast/Time Warner Cable and AT&T Inc. (NYSE: T)/DirecTV Group Inc. (NYSE: DTV) deals not expected to close until at least the end of the year, Cisco executives expect continued softness for at least another six months. Talking about the "temporary slowing effects" on capital spending that such mergers can have, Chambers said he doesn't expect to see a pickup in service provider revenues for at least two more fiscal quarters. "It's probably going to be tough for a little while," he said.
Arris Chairman and CEO Bob Stanzione sounded a similar theme on his company's earnings call with analysts two weeks ago. Stanzione said the pending mergers could create "disturbances in the business" this fall and winter.
Like Stanzione, Chambers predicted that service provider capex levels will rise again once the deals have been consummated. In the long run, he said, service provider consolidation should create new opportunities for Cisco.
Even in the short term, though, Cisco officials are clearly not satisfied with the service provider video segment's performance. In his opening remarks, Chambers said that the company has already made "top leadership changes" in the area. While he didn't go into detail, Cisco recently wooed veteran cable executive Yvette Kanouff from Cablevision Systems Corp. (NYSE: CVC) to head up its service provider video software and solutions group.
"I think we need to do better" with service providers, Chambers said. But, he noted, "that's a couple-of-quarters phenomenon."
Longer term, Cisco is seeking to move its service provider business from its traditional reliance on routers and boxes to a focus on end-to-end architectures and software solutions, just as it has been doing in the enterprise space. "The service provider customers love the approach," Chambers said, noting that the only complaint he's heard is why Cisco didn't take that step sooner. "We'll make a pretty good transition in the next one to two years."
— Alan Breznick, Cable/Video Practice Leader, Light Reading