Enterprise networking major Cisco Systems is planning to cut 5,500 jobs, while focusing on software to maintain revenue and margin growth.
Cisco revenue
Cisco revenue rose 2 percent to $12.63 billion in Q4 fiscal 2016.
Cisco generated 30 percent revenue from switching, 15 percent from NGN routing, 9 percent from collaboration, 7 percent from data center, 6 percent from wireless, 4 percent from security, 4 percent from SP video and 24 percent from services.
Cisco revenue fell 6 percent in NGN routing, 1 percent in data center and 12 percent in SP video. Cisco revenue grew 2 percent in switching, 6 percent in collaboration, 5 percent in wireless, 16 percent in security, 114 percent in other products and 5 percent in service.
Cisco generated 3 percent revenue from enterprises, 1 percent from public sector, 5 percent from commercial and 5 percent from service provider.
Cisco revenue analysis
Investments in Cisco’s secondary segments is driving overall growth and offsetting mixed results from its Switching and NGN Routing businesses, said Patrick Filkins, analyst at TBR.
Cisco ended Q2 2016 recording 2 percent organic revenue growth, excluding its set-top-box business, which the company divested in 4Q15. Continued growth in Cisco’s secondary Collaboration, Security and Wireless business lines enabled the company to notch low single-digit growth in Q1 2016 and Q2 2016 even as its traditional revenue drivers (Switching and NGN Routing) delivered mixed results. NGN Routing, in particular, recorded another down quarter, declining 6 percent . TBR believes lower aggregate demand from telecom operators for high-end routing products will continue, a trend Cisco is partially offsetting through increased exposure to web scale players where demand for routers is strong. Leading competitors, including Juniper and Nokia, also experienced lower operator demand for IP routers in Q2 2016.
Cisco confirmed plans to rationalize headcount following several software- and cloud-based acquisitions over the past year, a process which TBR believes began in Q2 2016 as headcount dipped 2.5 percent . Overall, Cisco plans to lay off 5,500 employees, or 7 percent of its workforce. TBR believes layoffs will likely be tied to legacy hardware units, paving the way for higher investment in its software portfolio. Monetizing software solutions will help Cisco mitigate the negative impact that virtualization is expected to have on its network and IT hardware businesses.
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Partnering with IBM enhances Cisco’s IoT position while pulling through sales of network infrastructure
In June Cisco announced a new partnership with IBM designed to further flesh out its IoT portfolio. IBM is a leading provider of IoT analytics software and professional services, and partnering with Cisco will help ease major adoption hurdles across the two businesses respective install bases due to a more unified solution. These assets have been tested and validated and will help customers reduce implementation time and costs.
While vendors such as Microsoft, Dell and GE have edge and centralized analytics and computing capabilities for IoT, which provide similar cost savings and time benefits, this partnership will create proofs of concept and increase customer awareness of hybrid IoT. For Cisco, the partnership adds a vital third component to its IoT system, bringing in a powerful centralized analytics engine to pair with its platform (Jasper) and connectivity plays. TBR believes the partnership ultimately strengthens Cisco’s classic revenue driver — edge routing — while complementing its IoT-based software, security, and software revenue opportunities. This agreement allows both companies to approach IoT with joint sales and go-to-market initiatives where it is most beneficial for both vendors. Because Cisco and IBM have separate cost structures under this agreement, we expect IBM to pursue partnerships with additional vendors, such as Juniper, to spur IoT market growth. At the same time, Cisco will explore tighter integration with other central analytics vendors, such as Microsoft and GE.
Building additional competencies in the data center is vital to capturing new investment
Cisco views the migration to cloud infrastructure (network and data center) as a strategic opportunity to capture increased spending on analytics. In June Cisco launched its Tetration Analytics, an on-premise vendor-agnostic appliance designed to simplify IT management. Tetration collects data using hardware and software sensors embedded in switches and virtual machines to ensure a comprehensive set of data across hybrid environments.
Delivering a higher-level IT management platform leveraging analytics will enable Cisco to monetize its existing ICT install base, but advancing an on-premise appliance is risky as some customers may instead opt for a hosted solution with lower up-front costs. To drive adoption, Cisco will emphasize the business case consisting of Tetration’s ability to deliver insights leading to a more secure framework, lower operating expenses and drive positive return-on-investment.