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Cisco Systems Inc.'s latest quarterly results indicate that the networking company is fending off the many startups trying to lure its customers away with software-defined networking (SDN) products.
Cisco reported this week that in its fiscal fourth quarter, which ended in July, sales of its SDN platform, Application Centric Infrastructure (ACI), rose 200% from the same period a year ago. Revenue from routers and switches, which together comprise almost half of the company's total revenue, increased 3% and 2%, respectively.
Rohit Mehraanalyst at IDC
The increase in ACI-related sales shows enterprises are warming up to Cisco's SDN platform, said Rohit Mehra, analyst at IDC in Framingham, Mass. Winning over enterprises, which make up Cisco's largest customer base, is critical to the company's success in the SDN market.
"I do think Cisco's full potential in this segment is still to play out," Mehra said.
Cisco's strongest market segments last quarter were enterprise and campus switches, Mehra said. The company also reported growth in access switches used to handle traffic from wireless LANs (WLANs), particularly those upgraded to the latest 802.11ac Wi-Fi standard.
"Cisco should continue to benefit from this upgrade cycle," Mehra said.
Cisco sells more software
Cisco also touted 21% growth in deferred product revenue, saying it was driven largely by subscription software sales in its security and collaboration portfolios. The increase indicates the hardware vendor is delivering on its promise to grow its software business.
Growth in Cisco's security business alone fell below analyst expectations. Mehra attributed the weakness to Cisco making the transition to selling software as a service.
"[Overall,] Cisco seems to be executing well on its previously articulated strategy of embracing software and cloud-managed capabilities in its portfolio," Mehra said.
Cisco is strengthening its software business through acquisition. In July, the company announced plans to acquire security as a service company OpenDNS for $635 million. Cisco wants to integrate OpenDNS services into its cloud-based security products to help them better protect networks that support the Internet of Things (IoT).
"We will continue to be very acquisitive going forward as we build out our portfolio, especially in areas like software and security," Kelly Kramer, CFO at Cisco, told analysts during the quarterly earnings call.
Cisco added 1,400 new Nexus 9000 customers in the quarter for a total of more than 4,100, Cisco Chief Executive Chuck Robbins told analysts in his first earnings call since succeeding longtime CEO John Chambers on July 26.
Cisco switch and router sales growth trails rivals
Cisco's overall growth in switching lags one of its hottest, smaller rivals: switch specialist Arista Networks Inc. Arista reported that revenue for the six-month period that ended on June 30 grew 47% year to year.
Cisco also trails some of its smaller rivals in router sales growth. Robbins acknowledged that Cisco has work to do in selling edge routers. "We need to probably improve our performance in our edge routing platform as we look ahead," he said.
Sales to service providers, defined as cable operators and carriers, grew 4% -- a significant improvement following a 7% decline in the previous quarter. Cisco has struggled for several quarters to improve sales to service providers.
Robbins said the improvement was due to the company reaching an "architectural vision alignment" with carriers and cable companies. "We're cautiously optimistic in this space," he said.
Cisco's overall revenue grew 3.9% to $12.8 billion. Net income increased 3.2% to $2.32 billion, or 45 cents a share. The results beat analyst estimates of $12.65 billion in revenue, according to a poll by Thomson Reuters.
For the current quarter, Cisco predicted revenue gains of between 2% and 4%, which is in line with analyst expectations.
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