Cisco Comes Roaring Back

Cisco’s efforts to revamp its business — cutting jobs and shaving US$1 billion from expenses — seems to be paying off. After three disappointing quarters, the company wowed the street with its fourth-quarter performance, delivering $11.2 billion in sales, exceeding Wall Street’s forecast of $10.98 billion. The company delivered GAAP income of $1.2 billion or $0.22 per share, and non-GAAP income of $2.2 billion or $0.40 per share. Now that’s more like it.

Cisco has faced its demons: growing competition, lack of corporate focus — which CEO John Chamber admitted last April — and slumping public-sector sales. The company committed to cuts and restructured its business units with network equipment on one side and software on the other. A new group was formed for voice, social networking, and WebEx conferencing.

The Giant Awakens

The distraction Cisco has experienced in the last year was due in part to aggressive overreaching.

“They expanded pretty rapidly, both through acquisition and organic growth,” Charles King, principal analyst at Pund-IT, told the E-Commerce Times. “In the last year, their ambitions have expanded beyond the market’s enthusiasm for the company.”

There was also an increase in competitive pressure, King noted. For one, Juniper and HP have entered Cisco’s space.

“A lot has changed in the last 12 to 18 months,” said King. “This is especially true in cloud computing, where networking plays such a crucial role. A lot of companies are shifting away from traditional technology where Cisco has been strong.”

Even with the added competition, a leaner Cisco seems better able to function effectively.

“Cisco has such a broad and deep set of solutions — it’s hard to count them out,” said King. “You expect periodic leap-frogging in this business, so it doesn’t surprise me the company comes back like this.”

The mix that changed Cisco’s fortune seems to be a one-two punch of cost cutting and product revamping.

“It’s both their expansion and their core networking that are paying off,” said King. “The restructuring has helped stabilize the company. They’ve done a lot of cost cutting.”

Learning to Compete

Although Cisco has been wandering in the desert over the last year and a half, perhaps what it most needed to do was simply to assert its value.

“Through all its troubles, Cisco was still a substantial company — a $40 billion company,” said Zeus Kerravala, senior vice president of global enterprise and consumer research at the Yankee Group.

“When it comes to this quarter’s success, it’s because they’ve been focusing more. They had been distracted for a year. Some of the cuts they made, and some of the statements of focus have helped,” he told the E-Commerce Times.

Cisco has long dominated the network market, but in the last year it has had some company, which may have jolted its executive team.

“In the past, Cisco was passive when it came to competitive issues,” said Kerravala. “They used to think if they did what they do well, business would come to them. That changed when Juniper and HP entered the market. Cisco was slow to respond to the new pressure.”

Cisco has been getting more aggressive, and it shows in the latest earnings report, Kerravala noted.

“They allowed HP and Juniper take a lot of business. Now they’ve taken their gloves off, especially with customers,” he said. “There were a number of deals in play that could have gone one way or another, and they went Cisco’s way.”

New Product Gleam

While Cisco’s comeback can be attributed largely to its core networking products, some of its new products are also showing signs of life. Revenue for its collaboration, wireless, data center, servers and video tools grew 7 percent — 31 percent of the company’s total sales. The trick seems to be marrying the new products to the core networking business.

“I think they have got a lot of mileage out of their new products, especially Voice over IP,” said Kerravala. “There’s a belief in the market that Cisco’s voice and networking work together better than any other solution. They’re bringing servicers and other products to the network. Their strength has always been the integration with the network.”

With new products a substantial part of the comeback, Cisco has avoided making a total retreat back to its traditional networking business.

“We’re seeing some momentum in Cisco building beyond its core networking,” said King. “Their ambitions in the server market are starting to pay off.”

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