Cisco Beats Street but Disappoints Bullish Analysts

Chambers Rubbishes Threats from Facebook, VMware

Outgoing Cisco CEO John Chambers addressed the last of his earnings calls last night, calling Q3 2015 “very solid” and asserting that Cisco was well-positioned for the future.

pg1-LNIF-John-Chambers-304He even rubbished the threats from companies such as Facebook and VMware through their software-defined network (SDN) offerings.

Garbage: In scathing remarks uncharacteristic of him, Mr Chambers minced no words in saying that “it is garbage to believe they will cut into the company’s 61% profit margins.”

With lower costs becoming the mantra for most enterprises in the race for greater profitability, the SDN threat, though, cannot be brushed aside and can eventually come to haunt Cisco.

SDN is cost-efficient as it relies on inexpensive hardware and software for connectivity. It thus has the potential to make Cisco’s pricey custom hardware and software obsolete although that is only a possibility in the distant future.

But Mr Chambers, taking comfort from the results the last few quarters, is confident that SDN would not hurt Cisco any more.

cisco_systems_hq2Facebook, a Customer: “When you have switching revenues up 11 per cent the last quarter and up 6 per cent this quarter, it’s off the charts,” Chambers said, adding that two years ago everybody was modeling growth at “zero and modeling our margins to go down.”.

Still, the threat is about two years old and Cisco did not take it lightly and came up with its own line of cheap commodity switches, with even Facebook reported to be a customer. Its Nexus 9000 and Nexus 3000 switches are helping it meet the challenge.

FBA Trickle: VMware is the leader in the SDN space with claims that its NSX offering is being tested by more than 400 customers. But its NSX revenues, with 70 active customers, are currently put at only $50 million, which is just a trickle as opposed to the $3.6 billion that Cisco made from its switches in the last quarter alone, up 6% over the year-ago quarter..

NSX-Standalone-Graphic-300x206Importantly, Cisco does have its own SDN strategy with its Applications Policy Infrastructure Controller (APIC) designed to help businesses manage their data centers, speed up application deployments and deliver services more quickly.

Are Results Really Solid?: While Cisco beat the Street as expected the numbers do not look compelling enough to make the Q3 results “very solid”.

Analysts expected an EPS of 53 cents and revenues of US$12.07 billion. Cisco did not disappoint them coming in with a profit of 54 cents per share, though up by only a mere 6% from the previous quarter, and $12.14 billion, up 5%.

But it failed the most bullish of the analysts with one of them expecting 56 cents EPS and $12.23 billion.

So it does NOT look like Mr Chambers can bow down on a high as I had anticipated through my post on Monday.

Mr Chuck Robbins will replace him at the helm on July 26, 2015.

G Joslin Vethakumar

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