Cisco Collaboration Summit and Q1 Earnings – is Their Mojo Back?
For most of us, it’s pretty easy to tell which way you’d like to see this question answered. Few companies fit the “us-versus-them” mold in the UC space better than Cisco, and there are lots of people in both camps – and not really that many in the middle.
Sometimes writing a bit after the fact isn’t such a bad thing, and having attended their annual Collaboration Summit a few weeks back, I was certainly in the plus column. Fellow UCS Expert Blair Pleasant wrote a more timely review of the event, and since we shared many of the positive impressions, I won’t re-visit that here – better you just read her post.
Since then, I’ve been full-on busy with more travel and client work, and am just now getting to this post. Turns out my timing is good, since Cisco had their Q1 2014 earnings call last week. Overall performance was alright, but there definitely were some things the street didn’t like, and their stock took an immediate 10 percent hit the next day. So, if you’re a money guy, you probably don’t think Cisco has their mojo back, especially since Microsoft’s stock has been trending upward nicely this month.
By writing this post now, I get to straddle the line between the great vibe from their event and Wall Street’s disappointment with Cisco’s earnings report. So, does Cisco have their mojo back or not? This isn’t my question, by the way – it was in fact posed by one of the Cisco executives during a panel session at the summit. There was a lot to like about the summit, and it was a valid question – really just wondering out loud, and it was pretty easy to conclude YES based on what they were sharing – which Blair provided a nice flavor of in her write-up.
So, what’s the problem? Well, according their Q1 earnings, collaboration is still finding its legs. At the summit we heard a lot about how it’s becoming a big growth driver, and you sure got the sense Cisco is very much in the driver’s seat with great technologies that businesses are just getting a taste of. There’s a heady mix of promise, innovation, re-invention, unlocked potential, etc., but the marketplace hasn’t quite caught up to Cisco yet.
For the Q1 period, their collaboration LOB only accounts for 8 percent of revenues, being roughly $1 billion. Perhaps more telling, their YOY growth for collaboration is a meager 1 percent. A LOT has happened in the UC&C space over the past year, and with so much great technology, you’d think this LOB would have shown more growth. Explanations about how competitive the environment is were cited, and while legit, there’s got to be more going on.
To be fair, you have to take the time lag into account here. The earnings results are for the most recent quarter (ending October 2013), and what we heard at the summit reflects current conditions as well as the pipeline they see coming. Whether or not this actually materializes won’t be known until the next earnings call, and you might want to make a note to tune in for that.
I found a few other clues from the earnings call that might explain things a big further. While collaboration isn’t yet a big growth driver for Cisco, they’ve certainly been touting it as a major opportunity, and perhaps that has gotten expectations up a bit too much. After all, you’ll know from our content on this portal that UC’s value proposition is difficult to define, and nobody has quite yet figured out how to make this the de facto productivity solution for all businesses. As such, WE know how hard this is to do, but maybe the investment community thinks it’s as easy as downloading an iPhone app. Should that really come as any surprise?
Two other things from the Q1 results stand out for me as additional clues as to where collaboration sits in the overall scheme of things. First is the direction some other lines of business are trending for Cisco. What’s hot and really growing for Cisco right now? Hint – it’s not collaboration. On a YOY percentage basis, it’s data centers – up a whopping 44 percent. This may only account for 5 percent of revenues, but it’s not that far behind collaboration – $1B compared to $600M, and at current rates data centers will be a bigger LOB within 2 years.
On a smaller scale, two other LOBs are showing solid growth – wireless and security – both up 8 percent YOY. Taken together these three growth areas are exactly what we heard so much about at the summit, especially mobility and the cloud. Collaboration may be the end result, but only when these other pieces are in place.
A corollary to these growth trends would be the most notable decline in Q1 – service provider video. I’m not 100 percent sure what this LOB really entails, but am pretty certain telepresence has a lot to do with it. With a 14 percent YOY drop in revenue, this makes sense to me. With the rapid ascent of desktop video (including Jabber), Cisco’s vaunted telepresence uber-solution is looking more like a Hummer in a sea of Mini Coopers. Both have similar functionality, but the more agile, scaled-down Mini is far more end-user friendly and reflects the way many of us like to drive.
I’ll be the first give Cisco full kudos for telepresence – which I did early on – but they’ve also read the tea leaves and wisely shifted focus over to WebEx, Jabber and now Jabber Guest. All of this reflects the trend to the cloud and the need to support mobile devices, so it all adds up for me. I hope this also adds up for our readers, as these trends collectively indicate where the market is going for UC. Whether you believe Cisco is leading us there or is simply a fast follower depends on how much you believe they can execute on all the wonderful innovation on hand at the summit.
Before wrapping up, I noted there was a second item of note from their earnings numbers. As much as we might like to view Cisco as a collaboration vendor – and they certainly want us to think this way – I mentioned that collaboration was only 8 percent of current revenues. Despite the fact that the words “routers” and “switches” were never heard at the summit, these two LOBs account for 53 percent of total revenues. In fact, the switching business was up 3 percent YOY, and as much as we know that long-term, the company will move away from hardware, this is still their bread and butter.
So, is their mojo back? Hard to say, right? The numbers don’t lie, so it’s easy to see why the financial community did their kneejerk selling. Managing growth expectations is really hard for companies like Cisco, and some areas of performance were weak, but the collaboration story is pretty strong. Since our perspective is so narrow, that’s all we see, so it’s easy for us to overlook how minor this LOB is overall.
Strategically, of course, it’s much more important, and on that note, the summit pushed all the right buttons. Blair captured that sense very well, and I just wanted to add there really was a sense of vitality, vision and culture change that personifies market leaders. Overall, the team that’s driving the collaboration business sure looks the part, and they seem to be delivering. The details would require another post, but I’ll just say their team gets it, meaning they have a realistic grasp of both the opportunities and challenges.
At this point, it seems to me that the next curve to jump will not be UC technologies, but the business models and finding the right balance that makes money for both Cisco and their channel partners. As my blues idol Muddy Waters would sing, “I got my mojo workin’,” and it will make a great theme song for Cisco if the vibe of the street and the summit becomes fully aligned, at which point it will be pretty tough to bet against them.
Also on UCStrategies.com on this topic: