Cisco Systems executives' efforts to expand the company's reach in the data center appear to be paying off.
The networking giant in the past few years has been extending its capabilities beyond its core switch and router businesses into areas such as cloud computing, security, mobility, software and services, fueled by CEO John Chambers' desire for Cisco to become more of an IT solutions provider that leverages its strong networking background.
Given the fast-moving trends in the data center, from big data to bring-your-own-device (BYOD) to cloud computing, "the network has never played a more central role," Chambers said during a conference call Nov. 13 with analysts and journalists to discuss Cisco's fiscal 2013 first-quarter financial results.
The quarterly numbers exceeded expectations. Cisco had $11.9 billion in sales, a 6 percent jump from the same period in 2011, and income of $2.1 billion, an 18 percent increase. Chambers said the U.S. market—the public sector being the exception—was stronger than it has been in past quarters, but that business in Europe was expected to "get worse before it gets better" and that the overall global economic picture was still challenging.
Chambers said he expects revenue in the current quarter to grow between 3.5 percent and 5.5 percent from the same period last year.
In the fiscal first quarter, Cisco saw revenue in both its core switching ($3.6 billion) and router ($2.1 billion) businesses—which account for almost half of all revenue—fall 2 percent, though the company saw solid sales of its Nexus line of switches, Chambers said. Still, much of that was offset by strong numbers in other business segments.
Cisco's data center revenue jumped 61 percent, while the enterprise business grew 54 percent. Sales of video technology—helped by the closing of Cisco's $5 billion acquisition of NDS Group—increased 30 percent. That said, Cisco's collaboration business—which includes such products as the telepresence equipment, WebEx online meeting technology and Jabber software—fell 8 percent from the same quarter last year.
"We need to do a better job in collaboration," Chambers said.
Cisco for several years has been looking to extend its networking expertise beyond switches and routers, and at one point was aggressively moving into more than two-dozen new markets. However, after several poor quarterly reports, Cisco refocused last year, jettisoning underperforming businesses and concentrating on five core areas. The restructuring also led to several thousand job cuts.
Services and software have become two key parts of Cisco's strategy, which some analysts have said is a smart move. In the quarter, Cisco's services revenue grew 11.9 percent, to $2.6 billion. Cassandra Mooshian, an analyst with Technology Business Research, said she expects that business to continue growing as the company addresses such areas as cloud computing and mobility.
"We believe the company's push to focusing on its services business is a result of the firm's initiative to focus on business and portfolio segments that improve margins companywide, particularly services, software and leveraging partner capabilities," Mooshian said in a Nov. 13 report. "We expect cloud and mobility to remain at the forefront of these initiatives as Cisco augments its product and services portfolios and capabilities to better meet customer demand for these key growth technologies."
She also noted Cisco's efforts to expand its partnerships in areas such as cloud computing, which will further fuel growth in services. Among those partners are Citrix Systems and VMware.
"Cisco is strategically expanding its software partnerships to gain exposure to a category it has a small presence in, other than its own attached software," Mooshian said. "As a result of the partnerships, Cisco Services will provide services for software-defined networking (SDN) and mobility offerings, two markets we anticipate significant growth in."
Addressing an analyst question, Chambers said Cisco now has the right mix of physical and virtual assets to address such issues as SDN and to give the company a competitive advantage against other vendors, some of whom are relying solely on software to make their mark in the networking business.
"We don't believe it's going to be a software-only world any more than it's going to be a hardware-only world," he said.
Chambers also dismissed concerns about competition from established networking vendors, noting that less than two years ago, there were reports about Hewlett-Packard, Juniper Networks, Huawei Technologies and others "eating our lunch."
"Fast forward 18 months, and we're beating them all," he said.