Cisco to pivot to software

Cisco’s Robbins: We’ll transition our revenues to a software, subscription-based model.

Cisco CEO Chuck Robbins is set on pivoting the routing giant toward becoming a software-based vendor, signaling its desire to satisfy customers like AT&T which is transitioning its network to software by the end of this decade.

“We believe we will transition more of our revenues to a software and subscription based model and accelerate our shift across our portfolio,” Robbins said during its fourth quarter and fiscal year 2016 earnings call, according to a Seeking Alpha transcript.

Already, the company is addressing the enterprise market’s transition to software defined wide area networking (SD-WAN) via its IWAN product portfolio. Verizon named Cisco along with Viptela as its initial SD-WAN vendors. The SD-WAN service allows business customers to “mix and match” private and public IP connections such as MPLS, wireless LTE, broadband and Ethernet.

“In the enterprise space, we have this transition to software defined wide area networking, which we are very well positioning right now with our IWAN portfolio and we are actually working on — a key differentiator for us which I think is — as our teams have built out the ability to really drive the next generation secure edge with our cloud security capabilities, the combination of dynamically provisioning those branch solutions with the ability to have robust cloud security and edge security is going to be a real differentiator for us,” Robbins said. “So we see that being another opportunity for us going forward in the routing space.”

From a revenue point of view, it appears that Cisco’s shift from a hardware to a software services business is paying off.

Robbins said in the fourth quarter that it saw the third “consecutive quarter of double-digit growth with revenue up 16 percent and deferred revenue growing 29 percent as a result of this shift.”

Despite the potential revenue upside that the hardware to software transition will produce, it has required the vendor to reduce its headcount. Citing sources close to the company, CRN initially reported that Cisco would cut 14,000 employees, or nearly 20 percent of its workforce.

However, the job losses were not as deep as the CRN report initially predicted. Instead of cutting 14,000 workers, Cisco said it plans to cut only 5,500 workers or 7 percent of its total workforce. The company said it will commence with the layoffs in the first quarter fiscal 2017.

Cisco said that by making this change it will be able “reinvest substantially” into security, IoT, collaboration, next generation data center and cloud while investing in other areas of future growth.

Product revenue growth was led by Security at 16 percent with $540 million in revenues. Collaboration, Wireless and Switching product revenue increased by 6 percent, 5 percent, and 2 percent to $1.14 billion, $752 million, and $3.8 billion, respectively. Other areas like NGN Routing and Data Center product revenue dipped by 6 percent and 1 percent to $1.9 billion and $873 million, respectively.

Robbins noted that the fourth quarter was a challenging time that saw “significant volatility” across the service provider and other key market segments.

“After three consecutive quarters of growth, both service provider and emerging markets turned negative,” Robbins said. “Service provider orders declined 5 percent reflecting the many challenges in that customer segment that you’ve heard from our peers.”

Cisco reported $12.6 billion in total revenue, up 2 percent, with product revenue up 1 percent and service revenue up 5 percent. Earnings per share on a GAAP basis were 42 cents.

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