How Cisco managed poor revenue performance in Q2 fiscal 2017

Cisco revenue in Q2 fiscal 2017

Cisco Systems said its revenue was $11.6 billion (–2 percent), with product revenue down 4 percent and service revenue up 5 percent in Q2 fiscal 2017.

Revenue of Cisco Systems’ fell 3 percent in America to $6,660 million, flat in EMEA to $3,065 million and dipped 3 percent in Asia Pacific to $1,855 million.

Cisco said its product revenue dropped to $8,491 million (–4 percent), while service revenue rose to $3,089 million (+5 percent).

Technology Business Review, in a research report, said that Cisco Services contributes 26.7 percent of total Cisco revenues, improving 200 basis points from 24.7 percent in Q4 2015, driven by innovation to develop security portfolio offerings as well as acceleration of its partnership with Ericsson around integration services and technology solutions.

“Services deferred revenue also grew 9 percent to $10.5 billion, supported by the product-attached and subscription-based revenue growth. Cisco services gross margin was 67.7 percent, improving 210 basis points from the year-ago quarter as the company drove productivity and cost-reduction initiatives,” said Kelly Lesiczka, research analyst at TBR.

Cisco and growth engines

Cisco’s revenue from Switching was $3,305 million (–5 percent), NGN Routing $1,817 million (–10 percent), Collaboration $1,062 million (+4 percent), Data Center $790 million (–4 percent), Wireless $632 million (+3 percent), Security $528 million (+14 percent), Service Provider Video $241 million (–41 percent).

Product revenue performance was led by Security which increased 14 percent. Collaboration and Wireless product revenue increased 4 percent and 3 percent, respectively. NGN Routing, Switching and Data Center product revenue decreased 10 percent, 5 percent and 4 percent, respectively. Service Provider Video product revenue decreased 41 percent.

“We are pleased with the quarter and the continued customer momentum as we help them drive security, automation and intelligence across the network and into the cloud,” said Chuck Robbins, CEO of Cisco. “We will remain focused on accelerating innovation across our portfolio as we continue to deliver value to customers.”

TBR said expanding resources and increasing awareness of next-generation capabilities enable Cisco to expand revenue in the APJC region.

The report said Cisco continues to strengthen its relationships with government agencies in Asia Pacific, Japan and China (APJC) indicated by its recent smart city engagement with the Guangdong Province in China and digital transformation engagement with the Maharashtra Government in India. While APJC is Cisco Services’ smallest geography and accounted for 14.6 percent of services revenue in 2016 it grew 15.9 percent outpacing growth in the Americas and EMEA.

Cisco to acquire more

Patrick Filkins, analyst at TBR, said revenue growth in Cisco’s secondary segments (Collaboration, Security and Wireless) was offset by lower network and data center infrastructure sales, driving an overall 2 percent revenue decline, excluding the CPE business.

While Cisco is partially offsetting its weaker ICT business by making software– and– cloud- based acquisitions, Cisco is likely to sustain or even accelerate its M&A cadence. Cisco is well-positioned to make additional acquisitions due to more than $70 billion in cash and short-term investments, and which would become easier if a Trump administration eases one-time cash repatriation penalties.

With the ICT hardware market expected to contract over the long-term, predominantly due to disruption from NFV and SDN, Cisco will balance M&A with cost-cutting initiatives, such as layoffs and the discontinuation of non-strategic programs, such as Intercloud.

Cisco will discontinue Intercloud in March 2017

Cisco will discontinue Intercloud in March 2017, signaling the end to a $1+ billion program which launched in 2014. Intercloud was envisioned as an alternative cloud service delivery model to large cloud providers, such as Amazon Web Services (AWS) and Microsoft, by connecting public cloud networks globally, but customer buy-in did not reach the level to which Cisco, and its customers, could profitably sustain the program.

Cisco will refocus on building and managing hybrid IT infrastructure, more in line with its traditional role as a components supplier. TBR believes the move is necessary as AWS, Microsoft, Google and other large cloud providers accrue a leading share of the public cloud market, nullifying the demand for Intercloud.

Baburajan K
[email protected]

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