Cisco's FY 2Q14 Earnings Reflect IDC's 3rd Platform Journey

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Information about Cisco's FY 2Q14 Earnings Reflect IDC's 3rd Platform Journey

Published on February 18, 2014

Author: laltes



Cisco's FY 2Q14 Earnings Reflect IDC's 3rd Platform Journey February 14, 2014 - IDC Link By: Vernon Turner On February 12, 2014, Cisco Systems reported its second-quarter results for the period ended January 25, 2014. Cisco reported second-quarter revenue of $11.2 billion, net income on a generally accepted accounting principles (GAAP) basis of $1.4 billion or $0.27 per share and non-GAAP net income of $2.5 billion or $0.47 per share. While revenues were down 8% year over year, it was in line with the market guidance and expectations. Cisco remains a healthy company with $48.2 billion in cash and cash equivalents and an ongoing product and sales strategy that is clearly trying to move into IDC's 3rd Platform domain (supporting cloud, big data, mobile, social, and emerging markets). Some of the key points from the earnings were as follows: • • • • • • • Switching revenue declined 12% year over year with orders down 6%, as some deals were delayed as a result of elongated evaluation testing and integration with Cisco's Application Centric Infrastructure (ACI). Service provider orders declined 12% year over year; SP Video orders including the settop boxes were down 20%. Service provider orders, excluding SP Video, were down 7%. Cisco commented that product transitions and core routing, along with the emerging markets weakness, negatively impacted service provider results. Data center revenue grew 10% to $605 million (for the quarter). With the combination of a strong UCS platform and Integrated Systems model (through VCE, NetApp, and others), Cisco is increasing its relevancy in the data center. Security revenue grew 17% to $393 million (for the quarter), with particular strength in network security up 21% and content security up 5%. The Sourcefire acquisition continues to help accelerate Cisco's position to provide customers with a single end-to-end architectural approach. Wireless and collaboration revenues declined 4% and 7%, respectively, with a decline of 9% year over year in unified communications (while the WebEx conferencing business had a very strong quarter up 21%). Services revenue grew 3% with both technical services and advanced services up 3%. The geographic and regional pictures were as follows: The Americas declined 5%. In the U.S., balancing out strong enterprise and commercial momentum, the U.S. public sector declined 4%, U.S. public sector state and local and education grew 7%, and U.S. federal declined 16%. U.S. service providers declined 11% mainly due to the SP Video transition and product cycles mentioned previously. Asia/Pacific, China, and Japan as a region declined 5%. China declined 8%. The Europe, Middle East, Africa, and Russia region declined 2%. The Insights to the Results To become the #1 IT company, IDC believes that Cisco, like many of the other major IT vendors, is witnessing the transformation of its customers moving from traditional IT demands (in IDC's 2nd Platform) to the 3rd Platform. Under this change, the IT vendors do need to have strong cloud, mobile, social, and big data product strategies. IDC believes that Cisco is executing well on its cloud strategies and can be seen in its data center and UCS and Nexus numbers. (A word of caution though as data center infrastructures look out to new mega-scaling facilities for service providers and the emergence of the ODM players may begin to impact Cisco's go-to-market plans.) However, customers need to see a strong social - 1-

and mobile strategy from its suppliers, and to this end, we believe that Cisco needs to accelerate its Collaboration and Wireless offerings to be more in line with the needs of the 3rd Platform. Finally, technology purchasing is shifting toward models built around consumption and services models. These will push revenue streams toward deferred business models, which Cisco appears to be feeling both the short-term impacts and the long-term benefits. Cisco services should be a major benefactor from this shift. Many of Cisco's competitors are facing the same challenge, but it appears that Cisco is finally making this transition, and consequently earnings could be bumpy during this period. The IT infrastructure to support the 3rd Platform pillars is heading toward a software-defined environment. In the long term, this will change the way network and data center architectures are planned, where content is created, stored, and managed. Cisco's strategy will play into this transition (and in particular in the Internet of Things adoption). However, Cisco needs to be better equipped to handle product life cycles and refreshes that feed into product and portfolio transitions. These cycles will be elongated by longer trials, cautious adoption, and customer anxiety over privacy and security. Done well, Cisco will be in a position to benefit from this new landscape and avoid the complete decline of hardware commoditization. Subscriptions Covered: Unified Communications, IT Cloud Decision Economics, Wireless Network Infrastructure, Datacenter Trends and Strategies, Google Strategic Advisory Service, Network Life-Cycle Services, Wireline Network Infrastructure, Datacenter Networks Please contact the IDC Hotline at 800.343.4952, ext.7988 (or +1.508.988.7988) or for information on applying the price of this document toward the purchase of an IDC or Industry Insights service or for information on additional copies or Web rights. Visit us on the Web at To view a list of IDC offices worldwide, visit Copyright 2014 IDC. Reproduction is forbidden unless authorized. All rights reserved. - 2-

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