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Cisco Earnings FY2017-Q4: Market Decline or Market Transition?

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Cisco Earnings FY2017-Q4: Market Decline or Market Transition?
    

By: -
20 Aug 2017
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For the period ended July 29, 2017, (Cisco's fiscal quarters and calendar quarters are not the same and the company provides analysts with data for both), Cisco reported revenues of $12.13 billion, down 4% from the same quarter a year earlier.  GAAP income was +$2.4 billion.  As our graph shows, this was the third consecutive quarter of Q/Q growth, a fact that management refers to as "another strong quarter" although total revenues are almost identical to what they were in Q1-2014.   The biggest problem segments for Cisco were Switching and NGN Routing, each of which declined by 9% Y/Y, but still represented 44% of total sales. 

On the positive side, Cisco points to a business transition taking place.  Over half of software sales are now in the form of subscriptions, and deferred product revenue from recurring software and subscriptions (a balance sheet item) hit the $5.0 billion mark.  Recurring revenue as a per cent of total revenue is now at 31%.  As everyone knows, transitioning from products to subscriptions leads typically to a short term revenue hit while hopefully generating steady income and long term growth eventually.  The communications market, and enterprise communications in specific, seem to be heading down this path.

Readers of this blog are undoubtedly most interested in the Collaboration side of Cisco.   For Cisco the collaboration segment, which generates about $1B in quarterly revenues, has multiple components, including contact center, unified messaging, IP phones (which can have huge quarterly ups and downs), IP telephony, web collaboration services, and video conferencing products.  Each of these components has its own growth trajectory.  The Q4 numbers for collaboration overall show growth +8.8% Q/Q, negative 3.5% Y/Y, and +9.7% growth on a 3-year CAGR.

For its fiscal year 2017, the company reported total revenues of $48,005M down 3% from FY2016 revenues of $49,247M.


Figure 1  Source is SEC edgar data base.


Figure 2  Source is SEC edgar data base

As we said last quarter, it's not clear at this time where Spark sits in the financial reports.  But the cloud service clearly will impact the company's web conferencing, VoIP, communications manager, and video conferencing businesses.  From a video conferencing perspective, it is tempting to interpret the numbers as demonstrating a shift away from traditional on-prem room endpoints and infrastructure towards personal endpoints (software) and cloud services.  Tempting - yes; logical - yes, but far from a proven fact.

So the big picture question remains.  Is the collaboration market growing or declining?  Or are we simply in the middle of a huge market transition from products to services?

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