Cisco (CSCO +1.99%) recently reported its fiscal fourth-quarter results, the first earnings report under new CEO Chuck Robbins. The company beat analyst estimates across the board, posting another quarter of revenue improvement, driven in part by growth in its core switching and routing businesses. While Cisco's numbers were impressive, management had a few things to say during the company's conference call that provided additional detail for investors.
SDN isn't killing Cisco
One of the major concerns regarding Cisco's business over the past few years has been the rise of software-defined networking, in which software is combined with cheap commodity networking hardware. Cisco's expensive, proprietary networking products, the core of its business, were at risk of being undercut by SDN-based solutions.
Cisco didn't take the SDN threat lightly. The company launched its own take on SDN, Application-Centric Infrastructure, along with new switches that take advantage of the technology. Adoption of Cisco's new products have been brisk, according to Robbins:
In switching, we are driving the transition to the Nexus 3000, Nexus 9000, and ACI, and in the quarter we grew revenue across those product families to $438 million, growing more than 100% year over year and more than 50% sequentially. We added 1,400 new Nexus 9000 customers, bringing us to over 4,100 total. And 26 of our 28 largest enterprise customers are now Nexus 9000 customers, with 30% of them new in Q4.
Cisco's total switching revenue during the fourth quarter was $3.72 billion, so these new products are still a small fraction of the total switching business. But the Nexus switches are being adopted extremely quickly, and as ACI becomes widely adopted, a competing SDN technology that gains ground and truly threatens Cisco's core business becomes decreasingly likely.
Growing the collaboration business
While Cisco is best known as a hardware company, software has become a big part of revenue, accounting for nearly 20% of Cisco's total during fiscal 2015, according to the company's recent investor-day presentation. Cisco's collaboration business is one area in which software is driving a shift toward recurring revenue, according to Robbins:
First, as we look at our collaboration business, two years ago we said we would overhaul our portfolio and shift it toward more recurring revenue. We delivered revenue growth of 14% and saw deferred revenue growth over 20% on the strength of our subscription and SaaS businesses.
Cisco's collaboration business generated $1.09 billion of revenue during the fourth quarter, about 8.5% of Cisco's total, so this growth is certainly meaningful. Cisco's routing business is twice as big, for example, but it grew by only 3% during the quarter.
Security shifting toward software
Cisco's security business slowed during the fourth quarter, growing by just 4% year over year. Part of this slowdown could be attributed to a rapid shift from hardware to subscription software and services; 47% of Cisco's security portfolio is now software. CFO Kelly Kramer had this to say:
In security this quarter, we saw the acceleration in the shift from hardware to software. Our customers are rapidly adopting our subscription-based and software offerings, which is helping us build a greater mix of recurring revenue. This transition is accelerating and will remain a focus for us going forward.
Deferred revenue related to security was up 26% during the quarter, suggesting that Cisco is winning business at a faster rate than its sluggish revenue growth would suggest. Cisco's FirePOWER security services essentially doubled its customer base during the fourth quarter, and it's currently growing 15 times as fast as it was when Cisco acquired Sourcefire in 2013. Cisco's ability to leverage its huge customer base should give the company a major advantage in the security business going forward.
Some acquisitions turn out well
Cisco has made some questionable acquisitions in the past; Flip Video and Linksys come to mind. But some of Cisco's acquisitions, which may have appeared expensive at the time, have turned out extremely well. Robbins explains:
And with Meraki, customers are rapidly adopting this new cloud-based consumption model. Three years ago we bought Meraki for $1.2 billion, with $100 million of annual orders. We closed this year with almost a $1 billion order run rate, scaling the business through our global commercial channels. These are just a few examples of what we are capable of when we focus, and this is what I intend to accelerate.
Meraki sells cloud-managed wireless networking hardware, and for Cisco it's turned into a major success story. Cisco paid about 10 times the annual order run rate when it acquired the company in 2012, but its scale has allowed it to grow Meraki rapidly over the past few years.
Cisco will undoubtedly make plenty of acquisitions in the coming years, and some of them will probably be duds. But the size of Cisco, with its big customer base and global reach, is capable of turning a small company with promising technology into a major business. While some of Cisco's future acquisitions will seem expensive, Meraki is an example of when paying a high price makes sense.
The BRICs are still a nightmare
Cisco produced revenue growth during the fourth quarter, and it grew even faster in the United States. But Robbins explained that the BRIC countries are still a big problem:
If we go through the five BRICM countries, Brazil actually was negative-45%. Russia was negative-38%. China was negative-3%, which actually was the best performance we've had in eight quarters. And we had some bright spots. India was plus-5%. Mexico was plus-26%, and Mexico had just a tremendous year in general. And all the emerging countries outside of those five actually grew 3%. So overall it was negative-2%, as we stated. So it's very much the same as it was last quarter.
Brazil and Russia performed extremely poorly during the quarter, but China did improve compared with recent quarters, even though it still declined. India and Mexico grew, but these countries collectively dragged down Cisco's growth rate considerably during the quarter.
Cisco cited macro and geopolitical issues for its poor performance in emerging markets, and it expects these issues to eventually resolve themselves. If this happens, Cisco's growth rate could receive a major boost.
