UPDATED 18:50 EDT / MAY 16 2016

NEWS

What to watch for in Cisco earnings

Can Cisco Systems Inc. continue to successfully dodge the bullet?

The company is scheduled to announce fiscal third-quarter earnings on Wednesday at 4:30 PM EDT, and investors have been bidding the stock up modestly in advance of the release. Consensus estimates call for Cisco to report earnings of 55 cents a share, up a penny from the year-earlier quarter. Revenues are expected to decline about 1.4 percent, compared to the two percent growth the company saw in the fiscal second quarter.

Cisco has a history of beating Wall Street forecasts, but the company is facing headwinds on a number of fronts right now. New CEO Chuck Robbins took over from the legendary John Chambers last July, and is still putting the final touches on his new executive team. Investors and customers have been impressed so far with the smoothness of the transition, but it’s still a work in progress, and the ripple effects of changes at the top can last for a couple of years.

Cisco also isn’t immune from the virtualization virus that has taken down other giants of the data center. While known primarily as a network vendor, Cisco is also the world’s fourth largest maker of servers with its Unified Computing System (UCS) line. In the third quarter of last year its server business grew faster than any other part of its business. With the bottom falling out of the Intel server market, it’s unlikely Cisco can avoid feeling the draft.

“The key indicator I’m looking for is the health of the UCS business,” said Stu Miniman, principal research contributor at Wikibon.  “UCS is core to Cisco’s data center strategy and has been the leader in converged infrastructure solutions.” Although Cisco was a little late in hyper-conveged infrastructure, it can make up lost ground through partnerships like a rumored alliance with Nutanix Inc.

Then there’s the network virtualization question. While customers’ embrace of technologies like software defined networking (SDN) and network function virtualization (NFV) has been much slower than their adoption of server virtualization was, the trend is indisputable. International Data Corp. expects the SDN market to reach $12.5 billion by 2020, a compound annual growth rate of 54 percent. Organizations like the Open Networking Foundation are bringing a disciplined approach to attacking knotty problems like SDN security and scalability.

Cisco initially resisted SDN, but it’s done an about-face under Robbins, who has declared that all of Cisco’s networking products will be available as software in the future. However, that hasn’t stopped the company from investing in custom application-specific integrated circuits (ASICs) and touting their superiority in high-performance enterprise applications. In fact, one of its four acquisitions this year was Leaba Semiconductor Ltd., a maker of networking semiconductors.

Nevertheless, the company is spreading its eggs around to other baskets. Cisco has declared its intention to be a top-two security vendor, and its 11 percent rise in second-quarter security revenues helped offset a slump in the switching business. Investors and customers alike will be  eager to get an update on the growth of that segment. Cisco is also dabbling in collaboration with its new Spark application, and has said it will revamp its impressive but pricey telepresence portfolio to be more accessible to the masses.

Uncertainty hasn’t tempered Cisco’s legendary acquisition appetite. Other companies it has acquired or announced plans so far this year include Internet of things platform Jasper Technologies Inc. and CliQr Technologies Inc., maker of an application-defined cloud orchestration platform.

Miniman said he’ll also be watching for news about MetaPod, Cisco’s managed on-premise cloud environment. “It’s doing well in the OpenStack space, but overall Cisco Intercloud has not demonstrated significant revenue yet,” he said.

While Cisco may not dodge the bullet entirely, it appears better positioned than many of its data center fraternity to minimize the blood loss.


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