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Factors that Can Drive Cisco Systems’ Growth

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Updated

Revenue by product

In the previous part of this series, we saw that Cisco Systems (CSCO) reported strong results for its fiscal 1Q16 results. Of its $12.7 billion revenue, Cisco derived 78% of its revenue, or $9.84 billion, from its wide product portfolio and 22%, or $2.84 billion, from services.

The company’s revenue was driven by a rebound in Switching products as well as strong growth in Collaboration and Data Center products. All other segments also reported growth, except NGN Routing and Service Provider Video. The company earns revenue from nine business segments, with maximum revenue earned from Switching and Routing.

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Switching

For the past few quarters, Cisco’s Switching business has reported lackluster growth. However, in fiscal 1Q16, sales rebounded and the segment reported 5% YoY (year-over-year) growth, which is higher than the 2% YoY growth reported in fiscal 4Q15.

In the fiscal 1Q16 earnings call, Cisco’s new CEO, Chuck Robbins, stated that he expects the sales of the new-generation switches to surpass sales of  old switches. He added that he expects these sales to hit “that inflection point” in the second half of fiscal 2016.

Collaboration

Cisco’s Collaboration business reported 17% YoY revenue growth in fiscal 1Q16. This segment includes new products such as unified communications, conferencing, Cisco telepresence systems, and enterprise mobile messaging.

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Data Center

Cisco’s Data Center was the company’s fastest-growing segment, reporting 24% YoY growth. This segment comprises the UCS (unified computing system) that integrates computing, storage, and networking.

Although the company does not have its own storage products, it has partnered with EMC (EMC), NetApp (NTAP), Hitachi, and IBM (IBM) to offer their storage products in UCS.

Wireless and Security

On a YoY basis, Cisco’s revenue from both its Wireless and Security businesses grew 7% each. The company is focusing on its Security segment to drive future growth. During the quarter, the company agreed to acquire Lancope, OpenDNS, Pawaa Software, and Portcullis to boost its Security business. All the acquisitions are expected to close in fiscal 2Q16.

NGN Routing and Service Provider Video

Not all of Cisco’s segments reported growth. The company’s Routing business reported 8% YoY decline in revenue in fiscal 1Q16 after posting 3% YoY growth in fiscal 4Q15. Edward Jones analyst Dave Heger attributed the negative growth to the changes in telecom service providers’ spending plans. Another struggling segment was Video Equipment, which reported a YoY decline of 2%.

The SPDR S&P 500 ETF (SPY) invests ~0.77% of its holdings in Cisco.

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