Cisco Buoyed by Collaboration, Security Units

As its switch and router businesses struggle, Cisco's efforts to expand beyond its core networking business are beginning to pay off.

Cisco collaboration

Cisco Systems officials are seeing the benefits of their yearslong effort to expand the company's business beyond core network switches and routers.

The company May 18 reported its switch and router units continued to see revenue declines in its most recent financial quarter, a situation that several years ago would have significantly dragged down Cisco's overall numbers.

However, starting under previous CEO John Chambers and continuing under his successor, Chuck Robbins, Cisco has been aggressive in building out its capabilities, expanding its communications and collaboration business and diving into software in areas such as security. At the same time, officials are growing the data center systems the company offers—along with the Unified Computing Systems (UCS), Cisco also is now in the growing hyperconverged space with its HyperFlex offering—and are embracing the trends toward software-defined infrastructure and the cloud.

That is beginning to pay off. In the company's fiscal year 2016 third quarter, revenue for Cisco's collaboration business—the third largest in the company behind switches and routers—saw revenue jump 10 percent, and the security business grew 17 percent over the same period last year. In contrast, its switch business dropped 3 percent year over year, and router revenue declined 5 percent.

As a result, overall revenue in the quarter hit $12 billion, a 1 percent year-to-year decrease, while income came in at $2.3 billion, a 4 percent decline. Both were better than financial analysts had expected.

Just as important, the company continues to see gains in the money it's bringing in through recurring revenue—an indication that more money is coming in via software licensing sales and services. The rise of the cloud and the emergence of such technologies as software-defined networking (SDN) and network-functions virtualization (NFV) threatens the traditional hardware sales model that Cisco and other established networking vendors have relied on for decades.

Cisco officials have pushed back with offerings such as the Application Centric Infrastructure (ACI) and an increased effort to move the enterprise networking business into a subscription model. Robbins also has accelerated the expansion of the growth businesses including collaboration and security while restructuring the company to better position it for a cloud-centric industry.

In a conference call about the quarterly earnings, Robbins noted the difficult macroeconomic environment as a key reason behind the struggles of the switch and router businesses, adding that customers "in times of uncertainty do not do infrastructure refreshes unless they have to."

However, they will spend money on what they need immediately, such as collaboration and security technologies. Cisco has spent a lot of money in these and other areas, much of it to buy companies whose products can fill some holes the portfolio.

"We invested over the last couple of years in new areas and the investments are paying off,” Robbins said.

Cisco's strategy is to expand its business and restructure the company as its customers increasingly embrace infrastructures built for the cloud, SDN and the Internet of things (IoT), according to Patrick Filkins, an analyst with Technology Business Research. That said, the company still has work to do.

"Like many of its peers, Cisco will be challenged by the business and financial model shifts associated with cloud services," Filkins wrote in a research note. "The most glaring threat will be to Cisco's existing customer base which is migrating to hybrid cloud, exposing them to a wider range of solutions outside the Cisco ecosystem which may be less expensive or easier to procure."