Switching Down, UCS Up in Latest Cisco Quarter 

The UCS converged systems business at Cisco Systems is beginning to find its natural level in the market, with slower growth that is nonetheless many times more than that of the systems market overall. And, as the financial results from Cisco for its third quarter of fiscal 2014 ended in April show, the overall datacenter business (which includes UCS systems and Nexus switching) is doing a lot better against the competition than its more plain vanilla switching and routing divisions.

As with other IT giants that were riding high on the IT expansion in China and India, the last few quarters have been tougher sledding for Cisco, which saw revenues contract by 5.5 percent to $11.55 billion in the April quarter. Services revenues across all product categories – and Cisco has a lot of them – rose by 2.6 percent to $2.73 billion, but product sales fell by 7.7 percent to $8.82 billion. Cisco was able to trim costs here and there, but spent more on research and development and its cost structure is still not quite in line with sales, so net income fell by 12 percent to $2.18 billion.

But it is not like you have to worry about Cisco's solvency. It has $6.24 billion in cash on hand and another $44.2 billion in investments, which washes out the $20.9 billion in debt that company is carrying quite nicely.

That said, worrying a bit about how Cisco is going to take on the whitebox switch and router movement and the advancement of network function virtualization (NFV) efforts is probably in order. Just as an example, Cisco switches are used by social media giant Facebook, which is the safe bet in switching for sure, but Facebook is behind the movement to create an open switch that will absolutely undermine profit margins for Cisco and its peers. The other thing to remember is that Cisco is resilient and adaptive, and the company that started out as one of the suppliers of routers for the early commercial Internet era moved into switching to dominate that market and has, against some pretty strong odds, carved out a respectable niche in the converged systems market. (See our report on the converged systems market here for more on that.)

In the April quarter, here's what the breakdown in sales was by general product line:

In a conference call with Wall Street analysts, chairman and CEO John Chambers said that the company has just introduced high-end switching and routing products and that it takes time for the new products to find their footing. The Nexus 9000 switches, which include software-defined networking (SDN) features baked into their circuits, had 175 customers in the April quarter, eight times as many as in the January quarter. The product has a pipeline that is nearly 1,000 customers deep, and these high-end switches come with a pretty hefty price tag.

Robert Lloyd, president of development and sales at the company, said on the call that in the core datacenter switching market, Cisco had a market share approaching 70 percent, and this is precisely where the company likes its share to be. Campus switching is declining, and Cisco warned that it would take a few more quarters before overall switching revenues would grow given the transition at the high end. The company is hoping, in fact, to have a similar ramp on the Nexus 9000 that it saw on the UCS blade servers.

The Data Center business, by which Cisco means the UCS blade and rack servers as well as Nexus converged switches often affiliated with them, grew by 29 percent to $662 million. When asked about how UCS was positioned against the competition, Chambers said that he felt "very comfortable with us continue to beat them pretty well," referring specifically to Hewlett-Packard, Dell, and IBM. And reminding everyone that the UCS line has had 17 consecutive quarters of sequential revenue growth.

"Our real competition here is white label," Chambers explained. "We saw this coming three to four years ago. We are going to sell architectures in the white-label approach as opposed to standalone products. I personally believe standalone products from any company, whether it is a standalone switch or a standalone server, will get squeezed pretty hard. And so our competition there is architecture and how you bring compute and network and storage together." That, he said, was what the application-centric approach in the Nexus 9000 switches coupled with the UCS systems was all about. "That should get premium floor space and we know how to sell it pretty well," Chambers added.

The main problem for Cisco seems to be a slump in the emerging markets. Brazil was down 27 percent in the quarter, and Russia was down 29 percent, while India was off 1 percent, China down 8 percent, and Mexico off 3 percent. Overall, orders in the Americas region was up 3 percent, while EMEA orders were down 1 percent and Asia/Pacific, Japan, and China as a group had an order slump of 5 percent. The good news for EnterpriseTech readers is that orders by enterprises in fiscal Q3 were up 6 percent year-on-year even as orders to service providers were down 5 percent. But revenues show a slightly different picture geographically. Revenues in the Americas were off 6 percent to $6.69 billion, and sales in EMEA were off 2 points to $3.07 billion and APJC was down 9 percent to $1.79 billion.