Cisco On Track for Sales Decline in Q2
Cisco Systems PR
When the networking giant Cisco Systems reports its quarterly results later today, analysts will be looking for any sign that the decline in sales CEO John Chambers so frankly predicted in February is anywhere close to abating.
Last quarter Chambers took the unusual step of delivering the bad news himself on a conference call rather than relying on CFO Frank Calderoni. The scenario he laid out was pretty dour: He said he expected revenue to fall between six percent and eight percent versus the same period last year.
Analysts are expecting Cisco to report a per-share profit of 48 cents on revenue of about $11.4 billion, and to give guidance for 51 cents on $11.7 billion in the quarter ending in July.
Cisco shares have barely moved since then. Having exited 2013 at $22.43 they have traded as high than $23.52 late last month, but closed at $22.86 yesterday.
Cisco has been suffering from the same problem that so many of the big, blue chip tech companies like IBM and Hewlett-Packard have: Its large, well-established lines of business have either flattened out or declined, while its new up-and-coming lines of business haven’t grown enough to make much impact.
For example, Cisco’s data center business — which includes its Unified Computing System, combining servers, storage and networking — grew 10 percent in the first quarter on a year on year basis and continued to take share away from other companies. But at $605 million last quarter, it accounted for about five percent of overall sales. The story was the same in security, where sales grew 17 percent, but which accounted for an even smaller piece of the revenue pie.
It’s at moments like this that Chambers likes to remind people that Cisco is an early indicator for trends hitting both the wider IT industry and the economy in general. His commentary on how Cisco’s sales pipeline around the world gives hints of what everyone else will be seeing within about two quarters is always interesting. But the story at Cisco is more complex.
The company faces what has, at times, been characterized as a monumental threat to its core business in the form of software-defined networking, or SDN. Essentially, SDN converts the functions of all the expensive and specialized switching and routing equipment that is Cisco’s bread and butter into software running on basic, commodity hardware.
Cisco rivals HP and Juniper are betting on it, as are other companies like VMware and the startup Big Switch Networks. Eventually, SDN is going to amount to something — but the joke making the rounds among the snarkier analysts who follow the business is that SDN really stands for “still does nothing.” It’s a small business, and among people who buy networking gear there’s still a lot of confusion over how — or if — the transition will play out.
Cisco has its own SDN play, a “spin-in” it launched in 2012 called Insiemi. When (or if) the transition to SDN begins for real, there are hints that Cisco has a strong chance of weathering the storm: A UBS survey of CIOs circulated yesterday by analyst Amitabh Passi found that 44 percent of CIOs in the survey sample preferred Cisco to other vendors. That was lower than the 50 percent rate seen in the first quarter of the year, but still well ahead of HP, Juniper, Alcatel-Lucent and VMware’s Nicira. “As long as confusion reigns and the market moves gradually, Cisco has options to navigate this transition,” Passi wrote.
There’s also Cisco’s cash: It had $47 billion in combined cash and short-term investments as of the quarter that ended in January, and while it has been boosting its dividend to quiet investors impatient for a longed-for upward move in the share price, it still has the option of buying interesting companies. There likely won’t be any specific hints on that front today, but Cisco is always on the prowl for a deal.