With conditions in its key markets stagnant, Cisco will focus on emerging regions to drive revenue growth

by Scott Dennehy, Engagement Manager/Senior Analyst

Cisco finishes its fiscal year strong despite weakness in Europe and the public sector

Considering the headwinds the company continues to face in several of its key customer segments and geographies as well as the organizational turmoil it has experienced over the last 12 to 18 months, Cisco generated solid financial performances for 2Q12 and its full fiscal year 2012 (4.4% and 6.6% year-to-year growth, respectively). Growth was driven by several of Cisco’s next-generation product segments (i.e., Wireless, Data Center) and Services as well as a rebound in NGN Routing.

However, revenue from Cisco’s Switching segment was flat in 2Q12, and Collaboration was down 7.8%, highlighting the challenges the company continues to face in Europe (particularly in the southern and central regions) and the public sector market in developed countries worldwide. As the spending environment in these markets will be weak for the foreseeable future, Cisco will look to emerging markets to compensate, including Brazil, Russia, India, China and Mexico. Emerging markets represent 20% of Cisco’s total revenue, a number the company will increase by aligning its resources with opportunities in these regions. In 2Q12 approximately one-half of the ~1,400 employees the company added during the quarter were in emerging/growth markets.

SDN attracted significant industry attention in 2012, however the technology is not yet a threat to Cisco’s switching business

With VMware’s acquisition of software-defined networking (SDN) startup Nicira for almost $1.3 billion in July, SDN is now at the forefront of the networking industry as the latest disruptive technology. While still in the very early stages of development, SDN can be viewed as a threat to companies like Cisco due to its potential to commoditize networking gear by standardizing and/or removing functionality these companies previously used to differentiate themselves. As a result, customers may look for cheaper alternatives, such as those from HP and Huawei.

However, the true nature and impact of SDN will not be known for several years; Cisco will therefore take a conservative approach to its investment in SDN until the best way to monetize the technology can be determined, starting with the Open Network Environment (ONE) framework it announced in June. As it has in other markets (e.g., switching), Cisco will establish a leadership position in SDN by utilizing a “build, buy, and partner” strategy that will enable the company to capitalize on the revenue opportunities that are created as SDN gains momentum.

Please feel free to use this content or call/email Scott Dennehy (603-758-1822) for additional commentary.

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