Networking giant Cisco Systems (NASDAQ:CSCO) recently posted mediocre second-quarter 2014 results. Although the revenue and earnings decreased from the year-ago level, they comfortably surpassed the street expectations. Lackluster sales in the emerging markets coupled with slowing demand from the telecommunication service providers continued to impact Cisco’s results. However, the company is increasingly focusing on the "Internet of everything" that could boost revenues going forward. Let’s first take a closer look at the quarter numbers.
Snapshot of the Quarter
Cisco reported adjusted second-quarter earnings of $0.47, down 7.8% from a year ago quarter. Revenue dropped 7.8% to $11.2 billion, but edged past Reuters' consensus estimate of $11.03 billion. The plunge in the top line is attributable to the fall in product revenue, which was slightly offset by higher service revenue.
Sales of routing, switching, wireless, service provider video and collaboration declined. The company’s core products, switching and routing, saw sales tumble 12% and 11%, respectively. However, the network equipment maker observed growth in the Services, Security and Data Center categories.
- Warning! GuruFocus has detected 5 Warning Signs with CSCO. Click here to check it out.
- CSCO 15-Year Financial Data
- The intrinsic value of CSCO
- Peter Lynch Chart of CSCO
The sales drop in the company’s core offering was mainly due to product transitions. Generally, customers are a little conservative with new offerings, which delays the purchasing decision. Therefore, new launches take quite a bit of time to show their impact on sales. Cisco rolled out new routers and switches in the second half of 2013, which could take as much as four to eight quarters to show in its results.
The company lost market share to its rival Juniper Networks (NYSE:JNPR) that posted solid fourth-quarter earnings reflecting improved revenue growth. The company’s routers and switching revenue saw double digit growth and helped it acquire a larger share in the market.
However, once the newly launched products become more popular, Cisco would regain its market dominance.
Cisco is facing a slowdown in its core businesses, especially from the emerging markets and service provider end-market. Orders declined 5% in Asia-Pacific, China and Japan, 5% in the U.S., and 2% in the Europe, Middle East Africa and Russia. Under such circumstances it is good to take a look at other opportunities. So the tech giant is increasing focus on the Internet of everything platform — developed on the Internet of things concept, which means connecting every device familiar to human lives and enterprises.
The company has launched a "fog computing" platform, which is expected to bridge the gap between network-connected devices and the data centers. Fog computing, which is a distributed computing infrastructure, will enable routers to compress data to simplify and accelerate analysis in real time.
Information technology market research firm Gartner sees a trillion-dollar opportunity with the Internet of things, and expects roughly 30 billion network-connected devices by 2020. Cisco chief John Chambers, too, believes that as much as $19 trillion in revenue could be generated from it within a few years. The company could be a prime beneficiary of the growth opportunity.
Cisco expects third-quarter revenue to decline in the range of 6% to 8% on a year-over-year basis. The weak outlook shows lower demand for its routing and switching products. But once the product transition completes and Cisco’s Internet of everything platform is developed, the company would fundamentally get stronger and be better equipped to contend with rivals.