Cisco Converged System Sales Still Booming
Cisco Systems is another in a line of IT giants that are reporting sales that are lower than expected and a consequential impact to the bottom line in its most recent financial results. While Cisco is under pressure in its core switching and routing markets, its Unified Computing System converged platforms are eating market share in the datacenter and still growing fast in a flat market.
In the company's first quarter of fiscal 2014 ended on October 26, the company's revenues only grew by 1.8 percent to $12.1 billion, a few points lower than expected. Net income fell by 4.6 percent to $2 billion. Profits in the quarter were impacted by a $237 million writedown related to workforce reductions announced back in August. Cisco took another $257 million pre-tax charge related to the acquisition of Insieme Networks – really a spin-in of a company it spun out several years ago to create the new Nexus 9000 line of high-end Ethernet switches launched last week. Cisco funded Insieme with $135 million and is prepared to pay another $836 million to acquire the 85 percent stake it did not hold in the firm; that amount depends in part on how well the Nexus 9000 switches sell.
Here's the breakdown in Cisco's sales by product line:
On a conference call with Wall Street analysts going over the numbers, CEO John Chambers said that gross margins on switching products "continue to be very stable" and appeared satisfied with the 3 percent revenue growth. The company's routing business slumped a bit, with a number of product transitions underway and a few large orders slipping into the future.
On the systems front, Cisco has been in the business for four and a half years now and cannot really be thought of as an upstart. The datacenter business at Cisco, which includes the UCS converged systems as well as related Nexus switches, grew by 44 percent to $601 million. Chambers said that sales of UCS machines through the Virtual Compute Environment partnership with EMC, which sells a combination of UCS systems, EMC storage, and VMware virtualization called a Vblock, are now selling at an annualized run rate above $1 billion. So too are the FlexPod configurations that Cisco sells in partnership with NetApp.
Like other IT suppliers, Cisco faced some challenges in Asia, and in China in particular. Taking out services revenues, Cisco in fact saw product orders fall in all of its geographies, with the Americas down 2 percent, EMEA down 4 percent, and Asia/Pacific down 10 percent. Sales in China were off 18 percent and in Japan were down 10 percent.
"China continued to decline as we and our peers work through the challenging political dynamics in that country," Chambers said.
Other emerging markets that have bolstered Cisco – and its IT peers and competitors – in past years were all down. Sales in Brazil were off 25 percent, in India down 18 percent, in Russia were down 30 percent. These four BRIC countries were the stars of the recovery in the wake of the Great Recession, but they seemed to have run out of gas.
The good news is that spending by enterprise customers was up 2 percent in the quarter, compared to a 13 percent drop for product orders by service providers and a 1 percent drop by those in the public sector.
