Cisco may still be weathering service provider telecom spending trends, but the vendor says that by pivoting its business toward software and automation, it will be prepared to address this customer segment’s needs when they raise spending levels again.
Like other vendors, Cisco is seeing slower service provider spending due to a spate of consolidation of larger service provider players like CenturyLink and Level 3, which recently completed their merger.
Chuck Robbins, CEO of Cisco, told investors during its second quarter 2018 earnings call that it will apply the knowledge and momentum it has gained in working with non-traditional cloud and internet-based providers.
“When we think about service providers, obviously one of the key variables for us is continuing to make the progress that we've been making in the web-scale community,” Robbins said during the earnings call, according to a Seeking Alpha transcript. “That's a key focus area for us, as they're included in this business. So that's certainly number one.”
Robbins added that the Cisco will continue to monitor capex levels from customers not only in the United States, but also across its global markets.
“The consistency of capex coming from everyone in this space around the world will certainly be a contributor to the future performance,” Robbins said. “So, I think that's the other thing that we look for. And then, third, as we mentioned at the financial analyst conference, we're also working on some next-generation platforms that we think can help us here as well.”
However, in the near-term, the vision is clouded by the fact that service provider revenue declined 5% during the quarter.
Catalyst 9000 platform gains momentum
One of the bright spots across the Cisco portfolio was growth of in sales of its new Catalyst 9000 switch.
The vendor reported that already 3,100 of its customers have adopted the switch and that it is continuing to see interest across its broader customer base.
“I think our total customer population is well over 800,000, so we obviously have room to run,” Robbins said. “From a segment perspective, the commercial marketplace has been a great adopter of the technology. And what I would tell you is that the enterprises have been evaluating it because it represents a different architectural approach with automation and analytics and security built into the network.”
Robbins said that the future it sees with the Catalyst 9000 and its Intent Networking approach to help enable automation across other product lines in its portfolio like routing.
“We will extend the capabilities across the rest of our portfolio so that our customers who are driving automation can drive it across not only campus switching, but also routing, bringing the Viptela SD-WAN capabilities to play,” Robbins said. “We are integrating it backward with ACI in the data center as well as within our security portfolio. So, our strategy is to continue to enhance our customers' ability to drive intent across all of their technology areas as well as to gain context through analytics out of all of their technologies.”
Return to growth
What was compelling for investors about Cisco’s second quarter 2018 results it was that it marks a return to revenue growth.
Here’s a breakdown of Cisco’s key metrics:
Products revenue: The vendor reported product revenue was up 3% to $8.71 billion. Infrastructure Platforms returned to growth, up 2% to $6.69 billion with what Cisco said was broad strength across the businesses. Within switching, Cisco reported strong growth in data center switching and momentum with its new campus switch, the Catalyst 9000.
Applications: Applications, which consists of collaboration portfolio of unified communications, conferencing and TelePresence as well as its IoT and application software businesses, Jasper and AppDynamics, was up 6 % to $1.18 billion. Cisco noted strength in TelePresence and conferencing as well as AppDynamics was offset by some weakness in UC endpoints.
Security: Driven by gains in unified threat and web security, security revenues rose 6% to $558 million. Cisco noted deferred revenue in the security segment grew 38% as we continue to drive more subscription-based software offers.
Services: Driven by growth in software and solutions support, services revenue was up 3% to $3.17 billion.
Financials: Total revenue was $11.9 billion, up 3%, with product revenue up 3% and service revenue up 3%. Cisco noted that 33% of total revenue was from recurring offers, up 2 percentage points from the second quarter of fiscal 2017. From a geographic point of view, Americas was up 5%, while EMEA was flat, and Asia-Pacific was down 2%.