Why Cisco's Q4 results weren't as bad as some people thought

Revenue was down for a third consecutive quarter, but Cisco still reached a significant milestone

It's fair to say that Cisco's fourth quarter results announcement last week didn't exactly set the world alight.

Revenue fell nine per cent, making it three quarters in a row of decline, while the forecast for the current quarter did little to impress investors.

Shares tumbled over 11 per cent and are yet to recover. In fact, they've dipped further.

But below the hard, top-line numbers were some important figures in Cisco's transformation quest.

For the full year, software and services made up over half of the vendor's revenue, at 51 per cent, beating Cisco's own target.

And of the software sales, 78 per cent came in a subscription model, beating the target of 66 per cent.

It is this transition, led by CEO Chuck Robbins, that has seen Cisco lauded over recent years, with its valuation doubling since the start of 2016.

But that doesn't mean that the vendor isn't still heavily reliant on its hardware sales, with hardware often the driver of the software subscriptions.

Marc Chang, CEO of Cisco Gold partner Block, told CRN that this is likely one of the reason why investors were spooked.

"Cisco still shifts a lot of hardware which comes with software and a large part of that now being subscription based," he said.

"This is most of its networking, datacentre and on-prem collaboration business which I am sure must have been hurt in many challenged sectors.

"Their pure subscription services such as Webex or security services have certainly exploded as people worked remotely and as they begin to convert these across from free licenses into paid services I am sure this will have a big impact."

Cisco did highlight the difficulties that it has faced as a result of disruption from the pandemic.

Infrastructure platforms was the hardest hit category, down 16 per cent year on year - with declines across switching, routing, datacentre and wireless.

In an interview with the Financial Times Robbins pointed the finger at the US government, claiming its disjointed approach to the pandemic had hurt businesses and halted spending.

"It sure feels like a coherent, nationwide testing programme would have been welcome," he said.

And on an earnings call he said that Cisco is still very much in the eye of the storm.

"I think that it feels to me very much like it felt 90 days ago," he said.

The vendor's response is to boost its R&D investment and accelerate plans to offer its entire portfolio as a service.

"Literally, we're looking at everything," the CEO added.

"We're looking at everything from our compute portfolio to clearly our software assets are already in the midst of that transition, and many of them are already being sold that way.

"We're even looking at how we deliver our traditional networking hardware as a service over time. So it is literally across the portfolio.

"We see an acceleration of some of the work that's already been underway."

Mark Forster, CEO at Comms-care, said he doesn't expect it to be long before these transformations return Cisco to year-over-year growth, with the vendor nudging partners towards areas including cloud, collaboration and analytics.

"With Cisco's clear intent in these areas, by either building or acquiring, I believe will return the vendor back to YoY growth quickly," he said.

"Transforming any business large or small to evolve a mature and established selling model with a product-centric DNA to something which can quickly react to market conditions without losing its USP of identity, is a massive challenge and one I feel Cisco should be commended for their approach and success on."

A mixed bag

The struggles of Cisco in certain markets have been reflected across its partner base, Block's Chang said.

"I think Cisco partners seem to be mixed depending on their exposure to the various revenue lines and verticals," he explained.

"For instance those selling hardware related product or solutions into retail or hospitality are having a challenging time.

"However, I have equally heard how people selling subscription into solid markets such as life sciences, legal etc, have had a great time.

"It will be interesting to see the Partner results over the coming months to see what the reality is as most results so far have been for pre COVID periods."