Since its earliest days, the main business of the giant networking company Cisco Systems has centered on selling hardware — mainly the routers and switches that move data around the internet.
Cisco CEO Chuck Robbins is making a big bet on subscriptions
The hope is to smooth out the harsh cycles that come with selling hardware.
Via Cisco
It’s still true in a big way, but the business has started to change with the times. As more companies are relying on rented computing services from the likes of Amazon Web Services and Microsoft’s Azure, they’ve tended to fill their data centers with less of Cisco’s hardware or upgrade it less often. At the same time, Cisco has faced new competition from companies offering less expensive products, like Arista Networks and lesser known vendors.
The tension between the old Cisco and a newer one was apparent in today’s Q3 earnings report.
The results were better than analysts expected, and Cisco shares rose by about 6 percent after hours. Revenue was $12 billion, down slightly year on year, while earnings were 57 cents per share.
Nearly half — about $5.3 billion — of Cisco’s Q3 revenue came from sales of routers and switches. Sales of both fell from this time a year ago, and have tended to rise and fall with the health of the global economy.
But where Cisco is growing — in areas that are relatively small now, like security and collaboration — says more about its long-term prospects. Its collaboration business -— Webex, video conferencing and phones — grew 10 percent to nearly $1.1 billion. Security grew 17 percent to $482 million, while the wireless business grew a relatively slow 1 percent to $615 million.
All of these businesses have a subscription-based aspect. Cisco’s Meraki office Wi-Fi products have a web-based management service that allows IT managers to quickly get offices up and running and issue updates without ever having to touch the gear itself. Cisco’s collaboration and security products are also often sold with a subscription component.
Cisco’s grand plan, started under former CEO and now Chairman John Chambers and continuing under current CEO Chuck Robbins, is to push for subscription revenue in other products. Next up: The switches that Cisco sells for use in data centers. “We’ve learned a lot from what we’ve done with Meraki and the collaboration business, and we’re in the early stages of applying it to switches,” Robbins said.
And here’s where the hints of future potential show up in Cisco’s results: Deferred revenue — essentially money that’s coming in for services not yet delivered — was $15.3 billion, up 8 percent. Much of it was for straight-up services like security, but about $5.4 billion was subscription revenue connected to the sale of a product.
When you consider that Cisco sells about $15 billion worth of switches every year, a cloud-based management service sold with them could, Robbins argues, help smooth out the sharper edges of recurring boom-and-bust cycles. Similar thinking led to Cisco’s move to spend $1.4 billion to acquire Jasper, an internet-of-things services company
And speaking of Cisco, Robbins is one of the speakers at our Code conference in Rancho Palos Verdes, Calif., later this month, and so will be answering questions about this very subject. He’ll be there with IBM CEO Ginni Rometty, Facebook COO Sheryl Sandberg and Google CEO Sundar Pichai, among others.
This article originally appeared on Recode.net.
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