Cisco faces challenges in a number of areas as was shown in its recent earnings report. But the networking giant will leverage its growing capabilities in segments such as data center offerings to counteract those challenges, says Scott Dennehy of Technology Business Research. He is a senior analyst.
HAMPTON, N.H. – Cisco (Nasdaq: CSCO) is wrestling with challenges in emerging markets, the U.S. public sector and the service provider segment.
As expected, conservative customer spending in emerging markets and the U.S. federal government, along with several major product transitions, resulted in Cisco’s first year-to-year revenue decline since 3Q09, a decrease of 7.8%.
The company also experienced sharp declines in gross and operating margin, down 740 and 820 basis points, respectively, although this was mostly due to lower revenue volume and a larger contribution from lower-margin product segments such as Service Provider Video and Data Center, rather than pricing pressure.
Cisco experienced year-to-year product order declines across all of its key emerging markets in 4Q13, as customer demand continues to fall due to economic concerns in those countries and the company manages through product transitions in the service provider segment. These conditions will persist in 1Q14 and will be key drivers behind another year-to-year revenue decline for Cisco, which TBR estimates will be approximately 6%.
TBR expects Cisco’s revenue will improve throughout 2014 as customer adoption of recently released, high-end switching and routing platforms, including the CRS-X, NCS and Nexus 9000 ramps up and the company leverages its dominant market share position, broad solution portfolio and industry-leading channel partner base to successfully capitalize on growth opportunities being driven by cloud, mobility and security.
However, Cisco will likely not achieve year-to-year revenue growth again until late 2014 or early 2015.
- Bolstered by Whiptail, Cisco Is Establishing Its Independence in the Data Center
Leveraging technology acquired from Whiptail in September 2013, Cisco quietly released the UCS Invicta Series of solid-state storage systems in December.
When the Whiptail acquisition was announced, Cisco and its storage partners claimed it would use the technology only to enhance performance in its UCS products rather than necessarily releasing new products under Whiptail’s Invicta brand. But these products will compete directly with flash-based products from EMC and NetApp, potentially damaging Cisco’s relationships with these key vendors (e.g., FlexPod, VSPEX, VCE) beyond repair.
Both EMC and NetApp continue to evolve their flash portfolios to address business-critical workloads, an area TBR expects Cisco will seek to further penetrate with the UCS Invicta Series.
For the first time, Cisco can now go to market with a fully converged infrastructure stack without depending on EMC and NetApp for storage components. While customer adoption of VCE and FlexPod solutions continues to be strong, Cisco’s ability to deliver a converged infrastructure offering will enable it to increase its value proposition through a more holistic design and one-stop support.
TBR believes the launch of the Invicta Series is another step forward in Cisco’s voyage further into the data center. The company has demonstrated in the past a willingness to end a major partnership if it believes there is greater benefit in targeting a market segment on its own, as it did with HP after entering the server market in 2009. However, Cisco will tread very carefully before deciding if its relationships with EMC and NetApp are no longer beneficial.
By cutting ties with HP, Cisco helped create a formidable enterprise networking competitor where one did not previously exist, and the company risks a similar result by severing its partnerships with EMC and NetApp.