UPDATED 18:07 EDT / AUGUST 17 2016

NEWS

Cisco earnings show company on track to software-first strategy

Cisco Systems Inc.’s quarterly revenues fell 2 percent from a year ago, but the company slightly beat Wall Street expectations on both the top and bottom line.

But the mostly upbeat earnings report was overshadowed by an announcement that Cisco will lay off up to 5,500 employees, or nearly 7 percent of its workforce, as it continues its transition to a software-driven business model.

Revenues of $12.64 billion beat consensus estimates of $12.57 billion. Earnings-per-share of 63 cents also topped consensus estimates of 60 cents. For the year, revenues were flat from last year’s $49.2 billion, but with other big infrastructure vendors in continuous decline, staying flat is an accomplishment. “We continue to manage our business well, and these results show our ability to execute,” said Chief Executive Chuck Robbins (pictured above).

Cisco’s shares, which fell 1.3 percent in trading today, fell another 1.3 percent in after-hours trading after the earnings and layoff announcement.

Business was mostly strong across geographies and industries with the exception of China – where revenues dropped 12 percent – and the service provider segment, where sales were down 5 percent. Over half of Cisco’s business comes from service providers, Robbins said.

Elsewhere, though, results were flat or better. Enterprise revenues grew 3 percent overall and across every region of the world. Orders grew 5 percent. Routing and data center revenues declined modestly, but most other part of the business were up. The areas that Cisco deems strategic – security, Internet of things (IoT), collaboration, data center and cloud – all grew in the double digits.

“Outside of service provider and emerging markets, we saw fairly consistent demand,” Robbins said.

The layoff announcement was expected, and may be the first of several rounds beginning in the next fiscal quarter. CRN reported earlier today that Cisco could lay off up to 14,000 people, or 20 percent of its global workforce. Coming so close to the earnings announcement, the news caught analysts by surprise. “The major layoff report really threw off a lot of analyst models, myself included, ” wrote Jack Mohr on TheStreet.com.

Some analysts said the 20 percent figure sounded extreme for a company whose business is not in free-fall, but Robbins and Chief Financial Officer Kelly Kramer made it clear on the earnings call that the company would manage expenses aggressively to maintain margins.

Cisco is attempting to take investors’ minds off its stagnant revenue by focusing them on operating margins, and there the news was also good. Gross margins were 64.6 percent in the quarter, up from 63.9 percent the previous quarter. Cisco also said its revenues grew 3 percent in all regions of the world except China.

Like other large data center infrastructure companies, Cisco is trying to pivot to a software-centric model without slipping into a downward spiral. By most accounts, the company is executing better than most of its peers. However, software-defined infrastructure hit the networking market later that it did the service business, and how quickly the transition will play out is still unclear.

“We are rapidly shifting our model from a primarily hardware business to a software and services business,” Robbins said. “We delivered our third consecutive quarter of double-digit growth in software.” Deferred revenue associated with software and subscriptions was up 33 percent and Cisco’s software-centric security business grew 16 percent with its own deferred revenue base growing 29 percent. Deferred revenue is important not only because it points to a healthy pipeline, but also highlights strength in the more predictable subscription business.

Barely one year into his position as CEO, Robbins has pulled off some impressive accomplishments, said Glenn O’Donnell (@glennodonnell), a Forrester Research Inc. vice president and research director who focuses on infrastructure and operations. Among them have been committing to move Cisco’s software portfolio to the cloud, getting the company focused around applications rather than just networks and substantially revamping the company’s IoT strategy to be more about value and less about devices.

“These are all monumental accomplishments in only a year,” O’Donnell said. “Making a company of this size move with agility is no easy task.”

While the company doesn’t try to compete in the broad-based infrastructure-as-a-service market, Robbins said cloud delivery is critical and that Cisco plans to make every software product it sells available as a service.

Security is another particularly ripe opportunity. Cisco believes it strength in the network puts it in an ideal position to help customers manage security at a high level, using analytics and threat detection to isolate attacks before they spread. “Cisco is uniquely positioned to deliver security at scale as we make the transition to cloud-delivered security,” Robbins said.

In other strategic areas, telepresence revenue grew in the double digits and revenue from collaboration products surged 9 percent to $4.4 billion. Data center revenue declined 1 percent, but Cisco’s HyperFlex hyper-converged offering “is experiencing solid early uptake,” Robbins said, with 500 new orders in the quarter.

 


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