Cisco Systems executives continue to push the company’s transformation into an enterprise IT solutions and services provider while navigating the challenges of a rapidly changing tech industry.
The company is extending its reach in the data center beyond its networking roots, but also must deal with trends and hurdles that threaten its businesses, from the move among cloud providers and enterprises toward software-defined networking (SDN) and network virtualization to debates over net neutrality in Washington, D.C., that are roiling the service providers that are a key customer base for Cisco.
The push and pull of what Cisco is trying to accomplish can be seen in the financial numbers from the company’s most recent quarter. During the company’s fiscal first quarter, Cisco generated record revenues of $12.2 billion, a 1.3 percent jump over the same period last year but essentially flat over the quarter. At the same time, Cisco collected $1.8 billion in net income, an 8.4 percent drop from the fiscal first quarter last year.
And while the company saw its sales in its core network switching business increase 3 percent, router sales were off 4 percent, and Cisco is continuing to see weakness among service providers and in emerging markets, two areas that have been a problem for the vendor for several quarters. Revenues from telecommunication vendors were down 10 percent over the same period in 2013, while sales in key emerging markets such as Brazil, Russia, India, China (BRIC) and Mexico fell 12 percent, according to Cisco officials.
In addition, overall revenues for the quarter were strong, but Chambers and CFO Frank Calderoni—who announced he will retire at the end of the year and will be replaced by Kelly Kramer, currently senior vice president of business technology and operations finance—said revenues for the current quarter will grow between 4 percent and 7 percent, slightly lower than what financial analysts had estimated.
Despite the mixed results, Chambers said he was pleased with the course of the company’s transformation.
“We are managing the business very well in a very tough environment,” he said during a conference call with analysts and journalists. “We are seeing the results of our three-year transformational work … moving from selling boxes to selling solutions and leading with innovation, speed [and] efficiency while we disrupt the market. … We are leading the technology and business transitions in the market.”
For example, Chambers said Cisco—which in August announced it was cutting 8 percent of its workforce—is performing well in the face of challenges from the trend toward SDN and network-functions virtualization (NFV), which are designed to enable organizations to build more flexible and affordable infrastructures by removing network intelligence from expensive and complex switches and routers and putting it into software that can run atop less costly commodity hardware.
The transition is seen as a threat to Cisco, which has made billions of dollars selling high-margin proprietary networking gear. Now the company is being challenged not only by top-tier tech vendors like Dell, Hewlett-Packard and VMware, but also a broad array of smaller companies such as Big Switch Networks, Plexxi and Cloudera that are pushing a more open networking environment and don’t have the legacy systems that Cisco has to protect.
Chambers and other Cisco executives have argued that what businesses are looking for are data center solutions that enable them to build environments that can be optimized to the workloads they’re running. Cisco is offering that through such efforts as its Application Centric Infrastructure (ACI)—which includes the company’s SDN technologies—and Unified Computing Systems (UCS).
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The company already is seeing results, he said. The Nexus 9000 switch platform—the foundation of ACI—grew its customer base from 580 to 900 over the quarter, and that the number of paying customers for the Application Policy Infrastructure Controller (APIC) has doubled since Cisco began shipping ACI technologies in late July.
“We are tying together the breadth of our product portfolio to deliver solutions that drive growth and economic opportunity, with security and scale,” Chamber said. “A year ago we were fighting an SDN perception battle, with competitors using PowerPoint instead of products. Today with ACI, we are bringing programmability and automation to networking on a scale well beyond what competitors define as SDN. Now we are in the market with products and solutions and don’t see either traditional box competitors or the PowerPoint newcomers able to keep up.”
Patrick Moorhead, principal analyst with Moor Insights and Strategy, said that despite some of the quarterly numbers, Cisco appears to be heading for trouble. The push for more open networking and SDN will drive businesses away from Cisco, Moorhead told eWEEK. Already most major public cloud providers are using technologies such as Big Switch’s open operating system or SDN solutions certified by consortiums such as OpenDaylight, of which Cisco was a founding member.
Enterprises have yet to fully embrace SDN while they wait for the technology to mature, but CIOs with whom he has spoken are looking for a reason to move away from Cisco’s more proprietary offerings, he said. That will come when enterprises begin launching private clouds over the next 18 months.
“That is really the iceberg that is in front of Cisco,” Moorhead said. “It’s not really a matter of ‘if,’ it’s more a matter of ‘when’.”
It will be difficult for Cisco to miss the iceberg as it continues to try to deal with the rising demand for open networking with technologies that may be more open than what the company has sold in the past, but which still have proprietary hooks in them, he said.
“I think the chances long term are low of them pulling this out,” Moorhead said. “Like IBM, no matter how you dress up something, the [air]of proprietariness and lock-in is impossible to get away from.”