May 13, 2015 marks the beginning of end of the John Chambers era at Cisco. This week, the company held its quarterly earnings call with Wall Street, and Chambers was in an uncharacteristically combative and celebratory mood. If this had been an NFL football game, I would have expected to see Chambers grab the football, run to the center of Texas Stadium, and spike it in the center of the big star, a la Terrell Owens. Maybe post retirement we will see him run in the VMware parking lot and spike a Nexus switch?
I've listened to many Cisco quarterly calls and I have never heard him chuckle as often as he did when referring to Cisco's place in the market or the momentum behind certain product like UCS, switching, wireless, and security. Not coincidentally, these are areas where many industry experts have predicted that Cisco would fail because of a lack of quality products and/or commoditization. After spending a couple of years revamping almost its entire portfolio, the company is seeing results, with the stock price having grown almost 30% in the past 12 months. This quarter was no exception, as the company set records for both revenue ($12.1 billion) and profits ($0.54 EPS).
The product area worth noting the most is switching. First because it's Cisco's largest source of revenue, but also because it seems for the past 20 years there has been constant chatter about the demise of this group. The latest threats to Cisco in switching are the trends towards software defined networks (SDNs) and white box switches.
The one thing Cisco has consistently proven over the years is that no matter how mature a market is, if there is room for innovation, customers will pay a premium. This quarter, switching grew 6%, with the Nexus 3000 and 9000 leading the way with 144% growth. Cisco added almost 1,000 Nexus 9000 and ACI customers this quarter, passing the 2,500 customer mark. Chambers also called out the fact that gross margins for switching have been stable despite the chatter of increasing competitive pressure. In the Q&A portion, one of the analysts challenged Chambers and suggested that switching should be growing faster, to which the CEO responded that the street had fired all kinds of arrows at the switching business in the past and he would never apologize for 6% growth in a market that large.
Data center continues to be strong, with 21% growth this quarter primarily driven by Cisco's Unified Computing System, which now has reached a $3 billion run rate and has over 43,000 customers. This is another proof point that innovation will stave off commoditization. Prior to Cisco's UCS, the server market was considered among the most commoditized of all IT products, but Cisco is having unprecedented success in a market that was filled with large, powerful incumbents. Today, Cisco sits as the share leader in the US for x86 blade servers.
Collaboration was another nice surprise. Many, myself included, had been vocal about the fact that Microsoft was leaving Cisco behind in collaboration. Cisco had seen three consecutive years of decline in that area. This quarter marks the third consecutive growth quarter for the collaboration group, with revenues increasing 7%. TelePresence endpoints saw an unprecedented boom with unit orders growing 66%. Collaboration seems to have turned the corner and has now returned to growth under GM and SVP Rowan Trollope. The new Spark product launched this quarter as well, giving Cisco a play in the business work stream collaboration market.
Other areas of strength worth noting were wireless, which saw 9% growth, with Meraki leading the way growing 92%. This was impressive given the backdrop of public sector weakness driven by E-Rate funding timing. Also, the security business, once thought to be over the hill, has seen a resurgence ever since the acquisition of SourceFire. Cisco appears to be back in security, and this should put some pressure on the thousands of smaller pure plays in the market.
Overall, Cisco has been remarkably stable given the chaotic technology environment. However, there remains a couple of pistons still not firing for Cisco, and those are service provider spending and the collapse of the emerging markets. These have nothing to do with Cisco but more to do with the global macro environment.
Chuck Robbins inherits a business that appears to be breaking away from many of its competitors even though it's only running on six cylinders. Once the telcos and emerging market countries start spending again we could see Cisco's growth accelerate even faster. As the company transitions away from Chambers, Robbins' aggressive nature should bode the company well.