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Cisco sales down in switching; up in software, services

Cisco sales last quarter revealed weakness in its switching and router business, as revenue from software subscriptions and cloud-based services increased.

Antone Gonsalves
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Published: 20 May 2016

Cisco's latest quarterly earnings showed a continuing slide in sales of traditional switches and routers -- its largest business -- as revenue grew from software subscriptions and cloud-based services.

The networking company reported Wednesday that revenue increased in five of its seven product portfolios. Overall, Cisco sales fell 1% year over year to $12 billion in the fiscal third quarter ended April 30.

Revenue from switches and routers dropped 3% and 5%, respectively. Together, the products accounted for more than 40% of the revenue in the quarter.

Cisco CEO Chuck Robbins blamed the decline on businesses delaying refreshes of their campus networks. He said companies were holding back spending due to uncertainties in financial markets, caused by the upcoming U.S. elections, geopolitical troubles in the European Union and political turmoil in Brazil, the world's ninth largest economy. Robbins had blamed macroeconomic conditions for sales declines in switches and routers the previous quarter.

"At an uncertain time, enterprises that have infrastructure that's functioning for them, they're not going to make the move to upgrade, so we see a pause in that refresh cycle," Robbins told financial analysts during an earnings conference call.

Cisco sales are hampered by industry trends directing companies away from the vendor's proprietary hardware. Many enterprises are turning to cloud computing to reduce the size of data centers. Also, financial institutions and cloud and communication service providers are moving network services from hardware to software running on commodity gear to reduce costs.

Cisco's strategy against these industry shifts is to provide more automation and programmability in its networking products, which will help customers reduce operational expenses, Robbins said. Cisco has wrapped much of that strategy in its Application Centric Infrastructure framework.

Cisco sales include high-growth products

Cisco reported its highest revenue growth in security and collaboration. The product categories grew 17% and 10%, respectively. Both represent Cisco's push into software and cloud-based services.

Almost half of Cisco's security sales, which reached $482 million in the quarter, came from software and subscription services, "which is clearly the direction that we had indicated we were going to take it," Robbins said.

Cisco sales showed much slower growth in the data center and wireless categories. Both segments grew 1%.

Most of Cisco's data center business depends on sales of its Unified Computing System servers. About 30% of Cisco's UCS business in the quarter was in rack server sales, Robbins said. Cisco also sells blade and hyper-converged systems.

Within the wireless category, Cisco is heavily focused on the Meraki product line of Wi-Fi access points and cloud-based management software. Meraki sales have risen to over $1 billion annually, and Cisco plans to take its network management approach to other product segments, Robbins said.

"We see a path to deploying that model across the rest of our portfolio, and again, that work has begun," he said.

Cisco net income fell 4% to $2.3 billion, which was better than Wall Street analyst estimates. Cisco's forecasts for the current quarter also beat analyst predictions. The company projected revenue growth from flat to 3%.

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