Cisco claims 7,400 UCS customers as of August

UCS is one of Cisco's break-out hits, but that won't save it from its restructuring woes

Cisco's Unified Computing System blade servers have been one of the company's surprise hits. As of August, Cisco claimed 7,400 total UCS customers, 2,000 of which were added last quarter, the company said.

This represents an increase of 240%, or $124 million, compared to the year ago quarter, mostly due to adding new customers, Cisco says.

Steve Duplessie, an analyst for the Enterprise Strategy Group, called the success of the UCS "Pretty impressive" in a Tweet via @stevedupe. Steve got an immediately reply by Enrico Signoretti (@esignoretti) who pointed out that the UCS's increased popularity coincides with it becoming more affordable. "@stevedupe on Cisco UCS, now they have a more reasonable price. Just curious to know if they will maintain the same margin," he Tweeted

So I looked into the margin question a bit and have to say, unfortunately, Cisco considers the UCS to be one of its lower margin products to begin with, at least compared to the kind of money it makes on its switching products. But then again, switching margins have particularly suffered since the introduction of the Nexus line.

As for the UCS, according to Cisco's 10K report filed with the SEC:

Sales of data center products increased by 49% or $386 million, due to a combination of increased sales of Cisco Unified Computing System products and storage sales, partially offset by slightly lower sales of application networking services products. ...

Additionally, our product gross margin continued to be negatively impacted by the shift in the mix of products sold as a result of revenue declines in our higher margin switching products coupled with revenue increases from our Cisco Unified Computing System products, which have lower gross margins. Our switching gross margins have been under pressure as we transition our products at the high-end of the portfolio. ...

Product gross margin for the first nine months of fiscal 2011 decreased by 4.1 percentage points primarily due to the impact of higher sales discounts, rebates and unfavorable product pricing. Additionally, our product gross margin was negatively impacted by the shift in the mix of products sold as a result of revenue declines in our higher margin switching products coupled with revenue increases from our Cisco Unified Computing System products.

So, while UCS increases in popularity with the enterprise, it won't "save" Cisco, if by "save" we mean allowing Cisco to continue to make the kind of profits it has historically racked up.

However, this is good news for the enterprise customer. Does Cisco really need to continue to be such a fat cat? The company is sitting on a hoard of cash. $44.59 billion (albeit only $3.1 billion of that is in the U.S. -- the rest is being stashed overseas until Chambers and other multinationals can convince Congress to let them repatriate it at a super low tax rate.) Cisco's cash hoard has increased dramatically and steadily over the past five years from about $25 billion in 2007.

Now, as I've said many times before, I've got nothing against cash. I personally love the stuff. But when your bank account is bigger than the GNP of many small countries, clearly there's room for more affordable prices to customers without hurting the stockholder. UCS could maybe create a new model of margin expectations for Cisco.

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Copyright © 2011 IDG Communications, Inc.

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