Cisco Continues to Struggle in Emerging Markets

CEO John Chambers remains optimistic about Cisco's direction despite softness in emerging markets and service provider space.

Cisco Systems continues to be battered by a shaky global economic environment in emerging markets even as the networking giant expands its reach in the data center and pushes its transition into areas such as mobile, security, the cloud and the Internet of everything.

Cisco reported Feb. 12 that revenues in the fiscal 2014 second quarter came in at $11.2 billion, a 7.8 percent drop from the same period a year earlier, while net income of $1.4 billion was a 54.5 percent decrease. The numbers were in line with what Cisco officials had forecasted in November 2013 when they released the first-quarter financial numbers.

And according to CEO John Chambers, the current quarter, which ends in April, will see continued revenue declines of 6 percent to 8 percent, with sales coming in between $11.2 billion and $11.5 billion.

The world's top networking switch and router vendor is being impacted on a number of fronts, including sliding sales in the increasingly important emerging markets like BRIC regions of Brazil, Russia, India and China. Overall, orders in emerging markets fell 3 percent, including 12 percent in the BRIC countries and 10 percent in Mexico.

In addition, telecommunications service provider orders fell 12 percent, and Cisco is undergoing several product transitions that are convincing organizations to delay orders until the new products are available, as illustrated by the double-digit revenue declines in both routers and switches. Analysts at Technology Business Research (TBR) said those pressures will continue into the current quarter, which they said in a research report will see revenue declines of about 6 percent.

Chambers has been trying to navigate Cisco through a difficult transition as the networking vendor expands its reach into a number of growth areas, such as the cloud, mobile and the Internet of everything (IoE), with increasing numbers of people, devices and systems being connected to the Internet and communicating with each other, generating tremendous amounts of data.

In all these areas, the foundation is the network, Chambers has said.

"With the network squarely at the center, we are building the platform for the Internet of everything with scale and security to address the unparalleled complex the requirements," he said during a conference call with analysts and journalists to discuss the quarter earnings numbers. "The Internet of everything is the biggest market opportunity ahead encompassing every technology trend in the market today."

At the same time, Cisco is working to protect and grow its legacy networking business against competition from the likes of Huawei Technologies, Hewlett-Packard and Juniper Networks, and the burgeoning software-defined networking (SDN) space, which is creating its own set of challengers. In addition, the company is looking to grow its data center capabilities beyond the networking, including servers and storage.

Cisco is aggressively rolling out products in these disparate areas. The company in November 2013 unveiled its Application-Centric Infrastructure effort, the result of its Insieme spin-in strategy. More recently, Cisco in January unveiled its InterCloud offering, which is software designed to enable businesses to move workloads and associated network and security policies between private and public clouds, including Amazon Web Services and Microsoft's Windows Azure.

Earlier this month, Cisco officials quietly launched its Unified Computing Systems (UCS) Invicta portfolio of solid-state drive (SSD) systems based on technology inherited through the company's $415 million acquisition of Whiptail in September 2013. Just as the launch of the UCS integrated data center solutions turned longtime server partner Hewlett-Packard into a competitor, the introduction of the Invicta line could put pressure on the company's partnerships with storage vendors EMC and NetApp, TBR analyst Scott Dennehy wrote in a research report.

"For the first time, Cisco can now go to market with a fully converged infrastructure stack without depending on EMC and NetApp for storage components," Dennehy wrote. "While customer adoption of VCE and FlexPod solutions continues to be strong, Cisco’s ability to deliver its own converged infrastructure offering will enable it to increase its value proposition through a more holistic design and one-stop support."