1. Cisco's FY 2Q14 Earnings Reflect IDC's 3rd Platform Journey
February 14, 2014 - IDC Link
By: Vernon Turner
On February 12, 2014, Cisco Systems reported its second-quarter results for the period ended January
25, 2014. Cisco reported second-quarter revenue of $11.2 billion, net income on a generally accepted
accounting principles (GAAP) basis of $1.4 billion or $0.27 per share and non-GAAP net income of $2.5
billion or $0.47 per share. While revenues were down 8% year over year, it was in line with the market
guidance and expectations. Cisco remains a healthy company with $48.2 billion in cash and cash
equivalents and an ongoing product and sales strategy that is clearly trying to move into IDC's 3rd Platform
domain (supporting cloud, big data, mobile, social, and emerging markets).
Some of the key points from the earnings were as follows:
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Switching revenue declined 12% year over year with orders down 6%, as some deals were
delayed as a result of elongated evaluation testing and integration with Cisco's Application
Centric Infrastructure (ACI).
Service provider orders declined 12% year over year; SP Video orders including the settop boxes were down 20%. Service provider orders, excluding SP Video, were down 7%.
Cisco commented that product transitions and core routing, along with the emerging
markets weakness, negatively impacted service provider results.
Data center revenue grew 10% to $605 million (for the quarter). With the combination of a
strong UCS platform and Integrated Systems model (through VCE, NetApp, and others),
Cisco is increasing its relevancy in the data center.
Security revenue grew 17% to $393 million (for the quarter), with particular strength in
network security up 21% and content security up 5%. The Sourcefire acquisition continues
to help accelerate Cisco's position to provide customers with a single end-to-end
architectural approach.
Wireless and collaboration revenues declined 4% and 7%, respectively, with a decline of
9% year over year in unified communications (while the WebEx conferencing business had
a very strong quarter up 21%).
Services revenue grew 3% with both technical services and advanced services up 3%.
The geographic and regional pictures were as follows: The Americas declined 5%. In the
U.S., balancing out strong enterprise and commercial momentum, the U.S. public sector
declined 4%, U.S. public sector state and local and education grew 7%, and U.S. federal
declined 16%. U.S. service providers declined 11% mainly due to the SP Video transition
and product cycles mentioned previously. Asia/Pacific, China, and Japan as a region
declined 5%. China declined 8%. The Europe, Middle East, Africa, and Russia region
declined 2%.
The Insights to the Results
To become the #1 IT company, IDC believes that Cisco, like many of the other major IT vendors, is
witnessing the transformation of its customers moving from traditional IT demands (in IDC's 2nd Platform)
to the 3rd Platform. Under this change, the IT vendors do need to have strong cloud, mobile, social, and
big data product strategies. IDC believes that Cisco is executing well on its cloud strategies and can be
seen in its data center and UCS and Nexus numbers. (A word of caution though as data center
infrastructures look out to new mega-scaling facilities for service providers and the emergence of the ODM
players may begin to impact Cisco's go-to-market plans.) However, customers need to see a strong social
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2. and mobile strategy from its suppliers, and to this end, we believe that Cisco needs to accelerate its
Collaboration and Wireless offerings to be more in line with the needs of the 3rd Platform. Finally,
technology purchasing is shifting toward models built around consumption and services models. These
will push revenue streams toward deferred business models, which Cisco appears to be feeling both the
short-term impacts and the long-term benefits. Cisco services should be a major benefactor from this shift.
Many of Cisco's competitors are facing the same challenge, but it appears that Cisco is finally making this
transition, and consequently earnings could be bumpy during this period.
The IT infrastructure to support the 3rd Platform pillars is heading toward a software-defined environment.
In the long term, this will change the way network and data center architectures are planned, where content
is created, stored, and managed. Cisco's strategy will play into this transition (and in particular in the
Internet of Things adoption). However, Cisco needs to be better equipped to handle product life cycles
and refreshes that feed into product and portfolio transitions. These cycles will be elongated by longer
trials, cautious adoption, and customer anxiety over privacy and security. Done well, Cisco will be in a
position to benefit from this new landscape and avoid the complete decline of hardware commoditization.
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