Cisco CEO Optimistic Despite More Losses

John Chambers touts the vendor's ACI and cloud efforts as its revenue declines continue to narrow.

Cisco Systems' struggles in emerging markets and in some of its core networking businesses are continuing to be a drag on the tech giant's financial numbers, but CEO John Chambers is confident the company is moving in the right direction.

In a conference call with analysts and journalists May 14 to talk about the vendor's third-quarter 2014 earnings, Chambers said despite another quarter of revenue and profit declines, Cisco's efforts in such areas as software-defined networking (SDN), converged data center solutions, the Internet of everything (IoE) and the cloud are helping the company build momentum.

"Our conviction about how we are evolving Cisco is strong," the CEO said. "You'll see us deliver incredible innovation [and] make bold moves in the market. … We are disrupting our competitors and at times ourselves."

In the quarter, Cisco's revenues came in at $11.55 billion, a 5.5 percent drop from the $12.22 billion during the same period a year ago. Income declined 12 percent, to $2.18 billion. However, the revenue drop-off wasn't as bad as the 6 to 8 percent Cisco officials had projected in the previous quarter, and they are forecasting a revenue loss of 1 to 3 percent for the current quarter.

The company continued to see softness in areas that have been problems for the last few quarters. In emerging markets like Brazil, Mexico and India, sales fell 13 percent. In its core switching and routing, Cisco saw revenues drop 6 percent and 10 percent, respectively, while product orders from service providers fell 5 percent. Collaboration revenues dropped 12 percent, though the company in April introduced a range of new features for its TelePresence offerings.

Chambers acknowledged those challenges, but pointed to areas Cisco is focusing on that promise strong growth over the next few months and years. The CEO said that the company's Application Centric Infrastructure (ACI) initiative, introduced in November 2013 as an answer to the growing SDN trend, is garnering interest from customers. ACI and the Nexus 9000 network switch it's based on has seen its customer base grow from 20 customers last quarter to 175 this summer, "with a pipeline approaching 1,000 customers," Chambers said.

The data center business saw revenues jump 29 percent, due in large part to its Unified Computing System (UCS) converged infrastructure solution. Chambers also pointed to the company's push into the cloud. Company officials in March announced it is investing $1 billion in its cloud efforts over the next two years, including building out a series of interconnected OpenStack cloud environments—dubbed the "intercloud"—to sell cloud services.

The move to the cloud is one that Cisco needs to do, even though the company initially will take a financial hit, according to Scott Denney, an analyst with Technology Business Research.

"The move is a significant departure from the company’s previous strategy of being just a cloud 'arms dealer' (i.e., providing the infrastructure elements to service providers and enterprises that enable public and private clouds)," Dennehy wrote in a research note. "The new cloud strategy will negatively impact Cisco’s hardware sales, particularly in the service provider segment, as customers will be able to leverage Cisco’s application-centric, network-aware services without buying routing and switching infrastructure for their cloud environments. However, the move is necessary to help the company evolve into a services-focused IT solutions provider, as cloud continues to upend the traditional hardware model—even for a dominant market leader such as Cisco."