Cisco Systems (NASDAQ:CSCO) is making a comeback. After slashing its long-term growth forecast in December last year, Cisco shares have bounced back in 2014, appreciating 10%. The company's recent quarterly results were also robust, paving the way for a better performance going forward. However, whether Cisco will be able to sustain the turnaround remains to be seen.
The company is facing competition from Juniper Networks (NYSE:JNPR) and Alcatel-Lucent (NYSE:ALU). Cisco will have to work hard in order to get back its lost market share that it conceded after the spying allegations.
Coming out of a slump
Cisco saw a decline in its revenue as well as profits in the third quarter, but the results were better than consensus expectations. Cisco's revenue dropped 5.5% to $11.5 billion from the year-ago period, but this was $200 million above street estimates. Net income declined 3.2% versus the year-ago quarter.
Despite the year-over-year decline in numbers, management is confident about the progress that Cisco is making. It is committed to increase the long-term strategic value delivered to its customers on the back of innovative products.
Products are gaining momentum
Cisco's product line is slowly gaining momentum. After a negative trend seen in the past three quarters, its router orders increased in the third quarter. Also, its Nexus 9000 and application-centric infrastructure is gaining significant market traction, considerably increasing its customer base in the last quarter.
In addition, Data center, UCS, and security segments witnessed good traction in the previous quarter. In a bid to improve its presence in TelePresence market, Cisco is launching its next-generation of collaboration solutions. These provide a new range of innovative, cloud-connected TelePresence products at very competitive price points.
Cisco has seen solid growth in some of its products such as ASR 9000, revenue from which grew 59% in the previous quarter. It is Cisco's fastest growing and most successful high-end router since the 7500 that was introduced over a decade ago. It saw a similar performance in NCS 6000 and the CRS-X, which performed above expectations.
The opportunities ahead
Looking forward, management is focusing on various innovations and is making moves to tap growth in the cloud and the Internet of Things. Cisco cloud applications such as WebEx and Meraki, which are already in the market, are performing well.
Cisco has invested $150 million in IoT start-ups to accelerate growth. Since IDC expects the IoT to open up an $8.9 trillion market for connectivity equipment and software, Cisco is positioning itself to benefit from this opportunity.
Cisco's software and services are gaining momentum. The company has entered into a multi-year deal to license its software portfolio to General Motors. Going forward, Cisco will partner with GM to deliver its business goals in areas such as the Internet of Everything.
Challenges to consider
Cisco is facing challenges in some key areas, however. The emerging markets have been a challenge for the company and orders in these markets declined 7% year over year. The company expects these headwinds to continue in the short term. The company is also seeing some weakness due to new product transitions in high-end routing and high-end switching.
Cisco has faced increased competition from Juniper and Alcatel. Juniper's new router, the MX104, has received positive responses from customers and the company expects sales of this router to grow further going forward. In addition, Juniper's QFX5100 top-of-rack switch is driving momentum in its switching business. Juniper has also seen robust sales of the EX and QFabric products. Going forward, the company believes that its recent design wins for these products at enterprise customers and service providers will lead to further revenue growth.
Alcatel is also seeing strong gains in its router and switching business, landing some good design wins in the U.S. The company had six design wins for its core router products when 2013 began, and took this number up to 20 design wins by the end of the year. Alcatel's core networking business was up 16% in 2013, and the trend is expected to continue in the future on the back of its new design wins.
Cisco has made good progress on its plans to return to growth, despite some macro and industry-specific challenges. The company is looking to innovate at a faster pace than any time in its history, which should help it compete with both Juniper and Alcatel going forward. Since Cisco is positioned to benefit from the IoT and cloud applications, it should continue improving in the long run.
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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.