Cisco surges after pricing switches-plus-subscriptions just below old hardware prices

Borg attack incoming as M&A crew eye repatriated $67bn

The flagship of Cisco's “intent-based networking” push, the Catalyst 9000 switch, is leaping out the door, and Switchzilla delivered other good news on it FY2018 Q2 earnings call.

The Catalyst 9000 is also in the vanguard of Cisco's other most important strategy, pivoting its income to software and subscriptions. That plan's gained momentum, too.

The software transformation means 33 percent of Cisco's income is now recurring revenue, with subscriptions now more than half the company's software sales (52 percent). For Q2 Cisco said it had US$5.5 billion in deferred product revenue from recurring software and subscription.

It's hardly the first time hardware vendors have attached software licensing models to iron, and Cisco is alert to why customers might resist it.

On the company's results call, CEO Chuck Robbins said for the Catalyst 9000, “we wanted the base subscription plus the product to be somewhere at or slightly below what they would have paid for the previous switch with a perpetual licence on it.”

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If Cisco had taken what customers were already buying and added subscription licences, customers would have seen straight through it and decided “we were just changing our financial model at their expense”.

“What we wanted to put in the advanced subscription was fundamentally new technology they couldn't get from us before”, he said.

Let's hope Cisco sticks with that approach, because Robbins also told the call intent-based networking technologies will spread as far through its product portfolio as possible.

“We will extend the capabilities across the rest of our portfolio – routing, SD-WAN, integrating backwards into the data centre and the security portfolio”, investors were told during the earnings call.

The Catalyst 9000 is in 3,100 customers so far, which Robbins says is the company's fastest product ramp-up ever. That had led to concerns about a possible gap between demand and supply, but CFO Kelly Kramer said the company expects no ongoing supply chain issues.

Adoption of intent-based networking was across the board both geographically and in key customer segments, Kramer said.

The numbers

  • Total revenue for the quarter up by three per cent to US$11.9 billion;
  • Applications ($1.2bn) and security ($558mn) each up six per cent;
  • Services up three per cent to nearly $3.2bn, while “other products” dipped 10% to $273mn.

Geographically, North America and EMEA both rose six per cent while the Asia-Pac market was flat. The enterprise market grew three points, public sector was up eight per cent, commercial up 14 per cent, but service providers remained weak, down by five per cent.

The service provider segment squeezed routing revenue, Robbins said (Cisco recently changed its reporting lines and no longer breaks out routers as a line of their own).

“We're going to take it quarter-by-quarter” to get the service provider market moving again, Robbins added.

Courtesy of its partnership with Google, Cisco's Container Platform is getting Kubernetes moving into the data centre, with Robbins saying he's “encouraged with the progress we're making with the Webscale community”.

That market had become tough for Switchzilla, in the face of initiatives like Facebook's Open Compute and Open Switch giving the world's biggest data centres a reason to limit their purchases of proprietary kit.

Expect an acceleration in Cisco's acquisition activity, because it's repatriated $67bn to America in response to the White House's tax plan. Kramer didn't quantify the company's M&A plans but emphasised such activity's importance to the company's strategies.

“We'll continue to look for any M&A targets that actually line up … with what we're trying to do strategically,” Robbins said.

The cash repatriation will probably lead to a return of funds to shareholders via a share buyback, Kramer added.

Because of the reporting periods it uses, Cisco won't get the “full benefit” of the Trump tax plan until the 2019 financial year, beginning in July. Its estimated non-GAAP effective tax rate will go from 21 percent in 2018 to 20 percent in 2019.

Switchzilla's financial documents and presentations are here. ®




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