At 30, Cisco sees double-digit growth ahead again
Cisco Systems (CSCO) turns 30 years old this week. But as business currently stands, there's little reason to celebrate.
Sales have declined in three of the past four quarters, profitability has dropped in five straight, and in August the company said it was cutting 6,000 jobs, or 8 percent of its workforce. Skeptics see the company's ubiquitous networking gear getting uprooted by an industry-wide shift to cloud computing and a decoupling of hardware and software.
Wall Street expects little better than 3 percent revenue growth in fiscal 2015, with meager acceleration from there.
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Chuck Robbins, Cisco's senior vice president of worldwide field operations, is doing his best to change the tone. The 17-year company loyalist and one of the top lieutenants to Chief Executive Officer John Chambers says math is working in Cisco's favor.
Robbins, who graduated with a mathematics degree from the University of North Carolina, spent a good chunk of April and May digging into the numbers and concluded that Cisco can return to double-digit sales growth. While the norm for much of the 2000s, Cisco hasn't recorded expansion like that in four years, and things have since been going in quite the opposite direction.
Here's the abbreviated version of Robbins' equation: The data center and wireless businesses grew by more than 10 percent in the latest quarter , and security jumped 25 percent. The trouble was largely an 18 percent decline in sales to U.S. service providers like AT&T (NYSE:T) and Verizon (VZ).
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The carriers will have to come back to build faster networks. Couple that with an eventual improvement in emerging markets (revenue dropped 7 percent in the leading emerging countries last quarter) and the Cisco we once knew reappears, or so the thinking goes.
"We've got a long way to go, we've got a lot to do and this is just Chuck's little mathematical exercise," Robbins said in an interview at the company's San Jose, California, headquarters.
Robbins was quick to point out that his numbers don't in any way amount to a company forecast, which Cisco only issues quarterly. Last month, Cisco projected revenue growth for the fiscal second quarter of 4 to 7 percent from a year earlier, and nothing has changed.
But Robbins has thought seriously enough about his analysis that he's discussed it at length with other senior executives, including Chambers. It's a message he wants company employees to rally around.
"When you can show them mathematically how it can happen, then people begin to believe a little more," he said.
Some 30,000 employees (of Cisco's 72,200-plus) are expected to tune into a company meeting on Thursday to honor the 30th anniversary. Participants from Europe, the Middle East and Asia will join by Telepresence, some live and others from a rebroadcast, to hear presentations from Chambers, Robbins and others.
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As employees dial in by video conference, many will do so with their national flags nearby as well as sports paraphernalia and photos of local landmarks.
Generating such excitement outside of Cisco's virtual walls won't be so easy. Alex Henderson has been tracking the company since the late 1990s and currently covers communications equipment stocks at Needham & Co. in New York. As he sees the future of information technology unfolding, Cisco's best days are in the past.
Businesses are moving from buying big expensive boxes loaded with proprietary software-Cisco's bread and butter-to purchasing cheap commodity hardware and filling it up with intelligent code from a variety of best-in-class vendors.
Henderson says the odds of a return to double-digit growth are "very, very low," because companies are shifting away from what he calls "branded I.T."
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"Ultimately, they're not going to pay for bells and whistles that Cisco sold to I.T. and buyers in the past," said Henderson, who has a hold rating on the stock. "Cisco has to reinvent itself. It can't continue to sell boxes the way it's been selling boxes."
This is mostly stuff that Cisco recognizes. The numbers don't lie: Cisco's flagship switch business shrank for three straight quarters before growing 3 percent in the latest period, while routing declined 4 percent and collaboration 10 percent in the most recent quarter.
Meanwhile, as traditional service providers have retrenched, emerging cloud businesses like Amazon (AMZN) Web Services, Google's (GOOGL) Compute Engine and Microsoft (MSFT) Azure are investing heavily in technology that lets businesses offload their computing and storage demands.
The bad news for Cisco is those tech giants aren't buying high-priced gear for their data centers, but instead opting for low-cost hardware that works just fine for all the software running their supercomputers.
IDC predicted last year that the cloud infrastructure market would grow 31 percent a year through 2018, after reaching $3.6 billion in 2013.
"That train has left the station and is just going to accelerate," said Krish Ramakrishnan, co-founder and CEO of Blue Jeans Network, a provider of Web-based conferencing systems.
Ramakrishnan previously worked in Cisco's server virtualization business. At Blue Jeans he's going up against his former employer by offering subscription software that lets video conferences take place from any device or browser. Cisco is trying to shift its business in that direction, but even if it succeeds, it does so at a much lower price than in the past.
"Either way, it's going to drive down the margins of these products," said Ramakrishnan, whose company counts Facebook (FB), Pandora (NYSE:P) and Office Depot (ODP) among its clients.
These are the trends Robbins is up against as he tries to re-energize the company. But he's convinced Cisco is in prime position to stay on top of the transitions. Whether it's through a new suite of cloud collaboration tools, reducing I.T. costs through software-defined networking or even securing the world's largest businesses and governments from sophisticated cyberattacks, Robbins speaks enthusiastically about Cisco's ability to compete and win.
A big part of that requires educating his workforce. In August, Robbins led an effort to bring 20,000 salespeople from around the globe to Las Vegas for a four-day event called Global Sales Experience. There the company engaged in "153,000 person hours" of training to put sales reps on the same page when it comes to promoting and selling the various new product offerings to customers demanding the latest and greatest in cloud technology.
Robbins even lured Hillary Clinton to be the guest speaker, and had Chambers interview the ex-secretary of state and first lady on stage. It's the first time in six years Cisco held such a gathering.
"I made the decision this summer that this was the year we'd bring that back, because I so believe that we're at an inflection point relative to what's possible for this company," Robbins said.
In addition to math, there's some logic to Robbins' bullishness. Cisco loves to talk about the Internet of Things (IoT), which broadly refers to a world where all gadgets are Web-connected, controllable remotely and loaded with data to be analyzed.
Think of shop floors and manufacturing plants and the networking of every piece of machinery. Or energy and utility companies that need to track their production and secure their facilities. Or connected cars and buses.
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Shouldn't Cisco, the company that built much of the plumbing for the global Internet even before there was such a thing, be as well positioned as anyone to link up everything else? "This is what we've done for 30 years," Robbins said.
The focus on IoT is one of the reasons Atlantic Equities analyst Josep Bori initiated coverage of Cisco with a buy rating in October, and may help explain the 20 percent rally in Cisco shares this year, double the gains in the S&P 500, despite such troublesome financial results.
Bori wrote that Cisco stands to be a "key beneficiary" in the emergence of IoT. Even so, the analyst is only predicting average revenue growth of 5.3 percent through 2017.
The reality is that at $47 billion in annual sales, moving the Cisco needle is an extremely tall order for any new business. The company's mammoth size is built on dominance in the giant switching and routing markets.
Only seven publicly traded U.S. tech companies are bigger than Cisco, and two of them-IBM (IBM) and Hewlett-Packard (HPQ)-shrank in the latest quarter. In other words, the biggest enterprise tech companies aren't growing.
Matt Howard, who was among Cisco's first 1,000 employees and has spent the past 14 years investing in enterprise start-ups at Norwest Venture Partners, is more optimistic on the networking company's future than are many of his venture capital peers, but cautiously so.
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On the plus side, Howard says that in Chambers' two decades as CEO, he's built a loyal customer base consisting of the biggest and most valuable customers in the world. Additionally, Chambers has a ton of cash ($52.1 billion) at his disposal to acquire into hot markets. The company has announced 16 acquisitions since the beginning of 2013, including security technology providers Sourcefire and ThreatGRID.
Still, how Cisco plays in a brand new era of computing and subscription software is a major question.
Companies "are taking big problems and chopping them into little pieces," said Howard, who worked at Cisco from 1992 to 1997. "Nobody wants to own anything today."
That brings us back to Chuck's math. For it to work, Cisco not only has to count on increased spending from service providers, but also be able to fend off younger, more nimble companies going directly after the heart of the business. Arista Networks (ANET), for example, is taking on Cisco in the switch market with a cloud-based networking offering. Its sales surged 53 percent in the latest quarter.
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Cisco has to win in software-defined networking, where it's in the game but not dominating as it did in the box business. It has to compete against commodity hardware and, perhaps most importantly, must convince customers that it can move with them to cloud, not stand in the way.
"We have to make more rapid changes in response to the dynamics in the marketplace, just like our customers do," Robbins said. "Our customers know that we've done this for 30 years, and they trust us."
The numbers better add up. The clock is ticking.
