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Cisco’s Data Center Business Is Becoming its Key Growth Area

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Mar. 25 2015, Updated 9:06 a.m. ET

Data centers have become the growth business for Cisco

In the previous part of this series, we discussed how Cisco (CSCO) managed to beat revenue and earnings per share estimates for fiscal 2Q15. The main driver of this growth has been data center sales. As the chart below shows, Cisco’s data center business grew by a year-over-year rate of 40% last quarter. Comparatively, Cisco’s other growth business—Routing, Security, Collaboration, Switching, and Wireless—grew much less. The Service Provider Video and Other segments showed negative growth rates.

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Cisco’s strength in data centers came on the back of its Unified Computing System (or UCS). UCS is a system that converges networking, storage, security, and applications into one infrastructure. This type of integrated infrastructure offers a cost-effective solution to Cisco’s customers. With the help of UCS servers, Cisco has managed to grow its servers systems business for data centers fast.

According to a report from IDC, Cisco’s worldwide servers system revenue grew at a year-over-year rate of 31% in 3Q14—much faster than the overall market growth of 4.8%. Comparatively, the two leaders in this market—HP (HPQ) and IBM (IBM)—showed negative growth of -0.5% and -17.8%, respectively. Dell, Cisco, and Oracle (ORCL) are ranked third, fourth, and fifth in this market, respectively.

Market leaders are showing negative growth due to a number of reasons

Although Cisco managed to grow its market share on the back of its UCS servers’ success, HP and IBM lost their market shares for a number of reasons. HP’s slight loss in market share was due to lower demand for its Itanium-based Integrity server, which was partially offset by the strength of GP’s x86-based ProLiant servers. HP launched its next-generation Gen9 ProLiant server in August 2014. These servers are equipped with Intel’s (INTC) Grantley platform.

IBM’s case is different. It’s facing a structural decline in its power systems and mainframes. Plus, IBM is in the process of divesting its hardware operations. IBM sold its PC business and x86 servers to Lenovo for $1.25 billion and $2.1 billion in 2005 and 2014, respectively.

If you’re bullish about Cisco’s UCS servers, you can invest in the Technology SPDR (XLK). XLK invests 3.6% of its holdings in Cisco.

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