You wouldn’t expect John Chambers to announce his retirement on the back of a weak quarter, would you?
Of course not. Analysts have assumed for years that the 20-year Cisco CEO would arrange to go out on a high note.
So any drama over Cisco’s third-quarter earnings, announced today, was defused with the May 4 announcement that Chuck Robbins will take over as CEO as of July 26, as Cisco’s fiscal year ends. The lack of any comment about the financials implied that the quarter would come out as expected, and it did.
Chambers had a lot of fun on today’s conference call with analysts. In the past year, he’s gone on the offensive in trashing Cisco’s competitors and predicting a new era of Cisco dominance. The Internet of Things and the competition from white box switches were two of the topics particularly on his mind. He didn’t hesitate to be a bit over-the-top with his comments about both.
Chambers even broke Cisco’s rule about never commenting on acquisition rumors, saying, “I wouldn’t bet on the one you heard about today.” FireEye stock had climbed about 5 percent on talk of a potential Cisco deal.
Running the Numbers
For its third quarter, which ended April 25, Cisco reported revenues of $12.1 billion and net income of $2.4 billion, or 47 cents per share. For the same quarter a year ago, Cisco reported revenues of $11.5 billion and net income of $2.2 billion, or 42 cents per share.
Non-GAAP net income of 54 cents per share beat the analyst consensus of 53 cents, according to Thomson First Call.
The quarter included what was apparently an aggressive push behind the Application-Centric Infrastructure (ACI), with 970 customers for the Nexus 9000 added during the quarter. That brings the total to 2,670 — the majority of which appear to be using the Nexus 9000 as simply a large switch, not as the basis of a software-defined networking (SDN) buildout.
Cisco did also announce a dramatic increase in customers for the Application Policy Infrastructure Controller (APIC), the element that brings ACI into the SDN realm. Cisco now has 580 APIC customers, up from the 300 it reported last quarter.
Trashing on White Boxes
Chambers did wax nostalgic a bit, comparing the rising Internet of things (IoT) industry to the Internet circa 1997. Cisco predicted great things for the Internet back then, Chambers said.
“At the time, almost no one understood what we saw. Today, it’s everyone’s idea. The conversations we are having with our customers are so similar, in many ways, to the ones we had 20 years ago,” Chambers said.
And he continued to rag on the threat of white box switches, declaring victory over off-the-shelf hardware.
Cisco’s switching revenues were just 6 percent higher than a year ago, at $3.56 billion — and last year’s numbers were particularly bad, making for an easy comparison, as one analyst pointed out.
But compared with the growth of zero that people would have expected previously, 6 percent is “off the charts,” Chambers said. “I will never apologize for growth in single digits in switching.”
White box switching is really just getting started as a serious commercial business (as opposed to the switches Google or Facebook built for themselves), so it might be a little early to call that fight. But Chambers, smelling blood, has been going in for the kill against white boxes, and he didn’t miss the opening during today’s call.
“All this garbage about new players coming in, software coming in, and white-label producers killing our margins was just wrong,” Chambers said. “We are beating our competitors that you all were worried about.”
Enterprise Strength, Carrier Weakness
U.S. enterprise orders grew 21 percent compared with last year’s third quarter. Cisco has been shifting its business to focus less on products and more on “business transformation” — that is, selling an entire architecture and then coaching the customer on how to wring business value out of the network.
Cisco has 1,200 business transformation projects in the sales pipeline, representing potentially $3.7 billion in business during the next 18 months. “Now, we won’t get all of that, but it can give you an idea of how that business opportunity has changed,” Chambers said.
One weak point to Cisco’s third quarter was the service provider market, where orders were down 7 percent compared with last year’s third quarter. Some of that was due to weaker sales to China (due partly to political reasons) and Russia.
But more generally, Cisco had to reorganize its service provider business, a change led by Robbins in the sales force and by Chief Development Officer Pankaj Patel on the engineering side. Patel, in particular, was charged with “knocking down silos in over 60 business units,” and is concentrating on getting projects done at a faster, startup-like pace, Chambers said.
“We said last quarter it was going to take time to get this fixed,” Chambers said, noting that any gains would come from the new organizational structure and not from any burst in spending by service providers.
“We are not modeling it because capex is going to increase. We think it’s going to be down in the back half of the year.”