Cisco steadies the ship despite weak carrier demand

Company is putting brakes on revenue decline, but has "bumps along the way" as it pursues growth in IoT, cloud and mobile

By: Caroline Gabriel 

Cisco steadied the ship in its fiscal third quarter (to April) and said the growth in mobile data and the internet of things continued to fuel demand. However, much of that stimulus is being felt in the traditional router business rather than the wireless products themselves, which delivered only 3% growth.

The company reported a 5.5% year-on-year fall in revenues to $11.5bn, but this was a less sharp decline than Wall Street had expected. Net profit was down 12% to $2.2bn and earnings per share dropped 8.7% to $0.42.

Cisco ended the quarter with total cash of $50.5bn, and is likely to be on its well-trodden acquisition trail this year to bolster its platforms for mobile and M2M data and the cloud, which it sees as the main sources of new revenues for its core network infrastructure offerings, and for emerging businesses such as SDN (software defined networking) and managed services.

Across the portfolio, a key challenge will be to improve performance in the carrier sector, which has been dragging down revenues even as the heartland enterprise business has improved. Cisco says the service provider operation will take "multiple quarters" to return to growth, though orders in Q314 were down 5% year-on-year, far better than the 12% decline seen in Q214 or 13% in Q114. A point of concern will be the 26% fall in revenue from service provider video systems, which Cisco has identified as a key growth area.

In contrast to many rivals, the weakest regions, in terms of the carrier segment and overall, were in emerging economies, while orders were up in the US and Europe, especially for enterprise products including high end routers, data center and security offerings.

Stabilization of the carrier business, recovery in enterprise, and the promise of new revenues from the IoT and the cloud, were all factors behind a better-than expected forecast for sales in the current fiscal fourth quarter. CEO John Chambers said Q4 revenue would be between $12bn and $12.3bn, which would represent a drop of 1% to 3% on the year-ago period, and a significant improvement on analyst predictions of $11.8bn.

Chambers remained cautious, however, pointing to slow progress among carriers - both a "macro and Cisco-specific" problem - and admitting on the analyst call that "we've got some real heavy lifting to do and I'm sure there will be a couple of bumps along the way, especially in emerging markets". Challenges include the shift to SDN, which will force Cisco to rethink not just its core products but its margins and channels, and which is seen by some customers as an opportunity to break the long reliance on Cisco's network platforms. "The industry has been doing a lot of work to become less reliant on Cisco," Matt Robison, an analyst at Wunderlich Securities, told Bloomberg.

Although Chambers has masterminded a major reorganization over the past few years - exiting the consumer sectors and starting the long transition to SDN - growth still proves elusive. In December the company reduced its forecast for average sales growth to between 3% and 6% for the next 3-5 years, down from an earlier projection of 5% to 7%. Cisco has reduced its workforce by over 12,000 in the past two years.

The return to growth will rely heaviy on the cloud and IoT, as well as increased mobile operator business, says the firm.

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