Editor’s note: Cassandra Mooshian is an analyst with Technology Business Research. She analyzes Cisco Systems’ cloud strategy and growth prospects following the company’s most recent earnings report..

HAMPTON, N.H. – Cisco Systems reported quarterly revenue of $12.4 billion, up 6.2% from the year-ago quarter in calendar 2Q13, Cisco’s fiscal 4Q13. Cisco Services’ revenue increased 5.6% over the same compare to $2.7 billion, with growth lagging product revenue growth for the first time since 3Q10 despite the company’s transition to a solutions-led approach. The company indicated this trend will continue for the next few quarters, followed by a turnaround in which services revenue growth again will be greater than product revenue growth on a year-to-year basis. TBR believes this short-term reverse in trending is due to partly Cisco’s recent cloud-related product advancements and increased customer adoption of Cisco’s technology, while services revenue upticks typically lag those of product revenue by a few quarters.

Corporate operating margin of 22.7% improved by 240 basis points from 2Q12, while TBR estimates Cisco Services’ operating margin increased 350 basis points to 42% in 2Q13, which we believe is a result of the recent focus on driving revenue from, and efficiencies within, its higher-margin services and software segments. We anticipate both corporate and services margins will fluctuate in coming quarters as Cisco takes on integration costs associated with recent acquisitions while simultaneously getting rid of redundant positions as a result of acquisitions. The company announced plans to lay off an estimated 4,000 employees due to weaker-than-anticipated economic recovery. TBR believes this also includes acquisition-related redundancies.

Cisco is investing in its cloud portfolio through alliances

Cisco and Microsoft expanded their alliance to accelerate the adoption of private and hybrid cloud infrastructures and boost related revenues. The program will be rolled out globally in tandem with Microsoft’s Cloud OS Accelerate program, which provides funds to help customers pay for the services cost of deployment, giving Cisco and Microsoft a better chance to win deals. The companies will offer integrated solutions based on Cisco’s Unified Computing System, UCS Manager and Cisco Nexus switching, combined with Microsoft Windows Server 2012 Hyper-V and System Center 2012. TBR believes Cisco will leverage this alliance to expand its cloud market share, especially in the growing private cloud market. We believe this alliance will generate significant sales opportunities for both companies as their integrated offerings will be sold by better aligned sales and delivery teams.

Cisco extended its strategic alliance with Citrix in June to integrate Citrix’s NetScaler application delivery controller into its Unified Fabric Cloud Network Services portfolio to boost network performance. NetScaler will be supported by Cisco’s technical support services division and sold by Cisco and its channel partners. TBR believes this partnership bolsters Cisco’s solutions-led cloud strategy as the company focuses on expanding its software and hardware partnerships with market leaders to enhance its portfolio and improve its position in the cloud market.

Cisco unveiled in July its Cloud Services Reseller program to help channel partners move to cloud-focused businesses models. The company will provide a framework and tool kit guide as well as learning credits. TBR believes Cisco is driving its channel partners to cloud to bolster its cloud revenues, as the company places big bets on the technology.

Cisco is boosting its emerging market SMB sales

Cisco launched in July two online channels for SMBs in Brazil, one focusing on solutions for SMBs and the other selling Cisco products. The websites will provide product and solution information for potential customers and give details on each Cisco Certified Partner’s expertise, certifications and specializations. TBR believes these online channels will boost Brazil channel sales by providing a useful marketing platform for partners as well as increasing information availability for potential customers, helping them become more comfortable with purchasing Cisco solutions.

TBR believes Cisco is focused on expanding it SMB sales globally due to its low market share in the segment, creating significant opportunities for double-digit growth. We believe the company will continue to pursue SMB sales growth through international alliances due to lower risk and local market connections. Cisco has taken on a stronger SMB focus since its acquisition of SMB-focused Meraki. We believe, however, the slowing of growth in emerging markets globally may undermine Cisco’s initiatives in Brazil and that the company, to grow share in the SMB space, will need to look to mature markets as well for SMB revenue opportunities.

(c) TBR