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Cisco's Switching, Data Center Businesses Feeling The Heat While Security Surges

Cisco customers are delaying campus switch purchases, contributing to a decline in switching revenue for the company's second fiscal quarter, but double-digit growth in security helped save the day.

Cisco Systems saw dips in both its bread-and-butter switching business and data center sales during its second fiscal quarter but still saw revenue growth overall for the quarter driven in part but a double-digit surge in security sales.

"We saw customers say, 'Hey, our infrastructure is working, so we're going to just hold on that for some period of time and let's see where things go,'" said Cisco CEO Chuck Robbins during the company's earnings call with Wall Street analysts Wednesday.

Executive vice president and CFO Kelly Kramer said Cisco has seen this pattern before during "volatile times."

"The four percent decline in switching was largely driven by macro weakness in our campus business, something we've observed in the past during volatile times as customer pause spending decisions," Kramer said.

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The four percent drop brought the San Jose, Calif.-based company's switching revenue to $3.48 billion for the quarter, ended January 23, while its data center business declined 3 percent to $822 million.

Michael Girouard, executive vice president of sales at TekLinks, a Birmingham, Ala.-based Cisco Gold partner said businesses are holding off on traditional infrastructure purchases right now because they're eyeing hyper-converged infrastructure solutions.

"It wouldn’t surprise me in the least that some of those dollars are just being delayed as companies look at whether they want to do a hyper-converged type of a platform rather than a data center refresh or data center switching refresh right now," said Girouard. "We're doing some things here at TekLinks to delay some of our decisions as we focus on whether hyper-converge is that next thing that we do."

Girouard said the hyper-converged market is "wide open right now" and that Cisco "needs to make" a major move in the space. Sources told CRN that Cisco is preparing an OEM agreement with hyper-converged startup SpringPath, although partners are pushing for an acquisition in the space.

For the second quarter overall, Cisco posted sales of $11.83 billion (excluding the service provider video CPE business it has sold), growing two percent year over year and beating Wall Street estimates of $11.6 billion.

The company's earnings grew 31 percent to $3.1 billion, or 62 cents per share, on a GAAP basis, up from $2.4 billion, or 46 cents per share, a year ago. On a non-GAAP basis, Cisco earned $2.93 billion, or 57 cents per share, up from $2.75 billion, or 53 cents per share, a year ago.

A major highlight for Cisco during the quarter was the 11 percent year-over-year growth it drove in its security business, which climbed to $462 million.


"As the largest security provider, we have been focused on driving the growth of this business while at the same time migrating our model from a primarily hardware business to a software and services business," said Robbins. "In Q2, not only did our security business grow 11 percent, but our security deferred revenue grew 26 percent."

Cisco said its advanced threat security and web security solutions grew over 180 percent and 40 percent, respectively. The networking leader also added over 2,000 Advanced Malware Protection (AMP) customers, bringing the total customer base for that offering to over 10,000.

"That's really satisfying to hear," said Girouard of the AMP customer growth. "Cisco's got a huge installed base that they can upsell to, and that's a good thing."

Cisco's routing business bounced back with 5 percent growth in the second quarter year-over year, with revenue reaching $1.85 billion. That business in the first quarter declined 8 percent year-over-year.

"We saw strength in routing and enterprise access routing. We have some new products in our portfolio that are very early … We expect to see some positive momentum over the next few quarters," said Robbins. "We got some virtualized routing capabilities that our teams are working on. So the portfolio looks good, and the pipeline looks good from an innovation perspective," he said.

Cisco's collaboration business increased 3 percent compared to a year ago to $1.02 billion, while its service provider video segment jumped 37 percent to $569 million.

Robbins said Cisco's software-defined networking Application Centric Infrastructure is now at a $2 billion run rate that grew 100 percent yea- over-year. He added that the company is seeing double-digit growth in its cloud-based Software-as-a-Service businesses – specifically WebEx, Meraki Cloud Networking and security.

The CEO also spotlighted Cisco's recent move to acquire Internet of Things specialist Jasper Technologies for $1.4 billion.

"Combined with our other capabilities, it's a strong example of how we will play a unique and strategic role in unlocking the value of IoT. We will enable our customers to monetize the data from the billions of sensors and connections with the security, speed and reliability they come to expect from Cisco," said Robbins.

When asked if Cisco's bullish 2015 acquisition spree would continue in 2016, Robbins said, "You should expect us to continue the pace."


Cisco Wednesday also revealed $15 billion in new buybacks which sent shares up nearly 8 percent in afterhours trading.

"Our portfolio is more strategic than ever to companies and countries that are digitizing everything," said Robbins. "We're moving full speed ahead."

For its third fiscal quarter, Cisco expects to see growth of 1 percent to 4 percent year-over-year on non-GAAP earnings of 54 cents to 56 cents per share.

The company's third quarter financial results are scheduled to be reported on May 19.

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