Editor’s note: Elitsa Bakalova is an analyst with Technology Business Research. She takes an inside look at Cisco’s latest earnings report.

HAMPTON, N.H. – Services revenues continue to expand in spite of declines in product sales as Cisco (Nasdaq: CSCO) assists customers in embracing new IT technologies through consulting and implementation

Cisco Systems reported quarterly revenue of $11.5 billion, down 5.5% from the year-ago quarter in calendar 1Q14, Cisco’s fiscal 3Q14. Cisco Services’ revenue increased 2.6% over the same compare to $2.7 billion, with growth significantly ahead of product revenue decline of 7.7%. While new products are beginning to show marginal reversal of revenue declines in hardware, services revenues continue to benefit from the transition to a services-led invigorated cloud focus.

The company predicts it will experience a 3% year-to-year growth in services revenue in the coming quarter before it expects to return to growth rates in the upper single digits as services architectures continue to be developed. Services are evolving to support the cloud delivery of IT infrastructure and assist clients in transforming their infrastructure to enable the Internet of Everything, bringing together people, process, data, and things through networked connections.

In 1Q14 corporate operating margin was down 210 basis points from the year-ago quarter to 22.0%, while TBR estimates Cisco Services’ operating margin declined 20 basis points to 41.0%, which we believe is a result of the company’s focus to continue to expand and further develop cloud enablement adoption and migration services as well security management and threat detection services.

  • Cisco makes network security a focus through its new Managed Threat Defense service

Cisco is building out its cybersecurity business to capture increasing demand for security services driven by companies seeking to protect themselves from increasingly complex cyber attacks. Following the acquisition of Sourcefire and the creation of the Security Services division in 2H13, Cisco continued to launch security services meant to address cloud, mobility, and the ever-growing Internet of Everything (IoE). As Cisco evolves its business model to increase the percentage of its revenue derived from services, the firm launched its Managed Threat Defense service in April. Designed to identify security threats on customer network infrastructure, the offering consists of Cisco hardware and software products and uses predictive analytics to capture, monitor, and analyze threats such as malware and harmful viruses. Cisco’s security operations centers monitor the data and provide incident response analysis, escalation, and remediation recommendations to customers. TBR expects the Managed Threat Defense service to appeal to the retail industry, often hit with large data breaches, and telecom carriers who require end-to-end workload security in lieu of point product integration.

  • Cisco is investing $1 billion in a global network of clouds and plans to deliver Cisco Cloud Services with and through partners

In March, Cisco announced that it will invest $1 billion over the next two years in its global Intercloud initiative, a network of clouds. A portion of the investment is going toward the build of global data centers to deliver cloud services with and through its partners and sell cloud services to service provider customers. The move is a departure from the company’s previous strategy of being just a cloud “enabler,” i.e., providing the infrastructure elements to service providers and enterprises that enable public and private clouds. Cisco will address declining revenue streams in its legacy hardware businesses, and accumulate sales in the growing cloud services segment. Partners such as Canopy, Logicalis Group and Wipro will augment Cisco Services’ consult-design-integrate-manage capabilities thus facilitating clients’ IT transformation and cloud adoption journeys.

  • Cisco expands its IoE Innovation Centers to foster a consultative way to technology adoption

Faced with challenging prospects in APAC, especially due to a difficult business climate in China, Cisco refocused its expansion on North America. As part of its plan to invest $4 billion in the next ten years in Ontario, Canada, and create 1,700 new jobs, Cisco is investing $100 million in Toronto which will be a site for one of four Internet of Everything (IoE) Innovation Centers. The move Indicates Cisco’s transition to a services-led approach as Toronto will be the North America hub for thought leadership and innovation, facilitating adoption of Cisco technologies and Smart+Connected solutions.

(C) Technology Business Research

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