Cisco CEO Touts Subscription Growth As Business In China Nosedives

Cisco CEO Chuck Robbins wants the market to know that the tech giant is moving full steam ahead on its mission to transform the company into a software-focused, subscription-first powerhouse.

In the last four months, Cisco has refreshed its entire switching, routing, and wireless portfolio, which now is entirely sold through a subscription model, Robbins said during the company's Q4 2019 earnings call on Wednesday evening.

"I would say we are in the second inning in this transformation with our customers. They are all rearchitecting their entire infrastructure to accommodate these traffic flows that are being presented from the massive number of cloud applications they are running," he said. "That requires a completely different infrastructure, which is what this portfolio is built for."

Software subscriptions now account for 70 percent of Cisco's total software revenue, Robbins said. For comparison, sixty-five percent of total software revenue came from software subscriptions in the previous quarter.

[Related: Cisco CEO Chuck Robbins On The 'Proven' Subscription Model And 'Huge' 5G Opportunity]

For the fourth quarter that ended July 30, 2019, Cisco's revenue rose 6 percent to $13.43 billion from $12.84 billion in the year-ago quarter, with products accounting for $10.12 billion and services at $3.31 billion. For the tech giant's full-year, product revenue totaled $39.01 billion and services totaled $12.89 billion on overall revenue of $51.90 billion.

Cisco's business in China, however, took a hit during the company's last fiscal quarter of the year.

“We did see in July some slight early indications of some macro shifts that we didn’t see in the prior quarter,” Robbins said, noting a “significant impact" because of the U.S.-China trade war. Cisco’s revenue in China was down 25 percent on an annualized basis in the quarter, Cisco CFO Kelly Kramer said during the call.

“What we’ve seen is in the state on enterprises ... we’re just being uninvited to bid,” Robbins said. “We’re not being allowed to even participate anymore.”

The company for the past two quarters had said that it felt "very limited" ill effects from Chinese tariffs and the ongoing trade war.

The San Jose-based tech giant's security segment continued to poste double-digit growth during Q4 2019. Security rose 14 percent in the quarter to $714 million. For the year, security grew 16 percent to $2.73 billion. Robbins said the security segment is getting a lift from Cisco's subscription-based security services in particular.

Cisco's Infrastructure segment, which includes the core switching and routing businesses as well as wireless and data center products, increased 6 percent during the quarter to $7.87 billion. The segment's revenues hit $30.19 billion during the year, climbing 7 percent when compared to 2018.  

Robbins said Cisco is seeing strong growth in the infrastructure segment, led by its next-generation enterprise networking solutions that have recently been injected with AI and machine-learning.

"Our technology is fundamentally redefining IT architecture to help our customers manage the complexities of a multi-cloud world and transform for the future," he said.

The company's Applications business segment, which includes AppDynamics and the company's video conferencing and collaboration portfolio, climbed up 11 percent to $1.48 billion in revenue in Q4. The segment jumped up 15 percent during the year to $5.80 billion.

Cisco's vision for cognitive collaboration is paying off, Robbins said. "We're leading the market in integrating AI into our collaboration portfolio, bringing in intelligence and context to help customers work smarter," he said.

Cisco's net income rose 9 percent to $3.59 billion during Q4 2019, up from $3.32 billion year-over-year.

Robbins did not comment on Wednesday's news that Cisco has laid off more than 480 employees at its San Jose and Milpitas offices in California, which marked the second round of major layoffs for the company within the last year. According to WARN notices received by the state of California's Employment Development Division last week, Cisco slashed 397 jobs at its headquarters in San Jose and another 91 in Milpitas, which were effective as of the last day of the company’s fiscal 2019 on July 31.

Cisco during the quarter announced its intent to acquire two companies; meeting and voice specialist Voicea, which the company expects to close in Cisco's first fiscal quarter of 2020 and Acacia Communications, a manufacturer of optical interconnect products, for $70 per share in cash in a $2.6 billion deal.