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Cisco's Earnings Reflect Industry Trends

Last week Cisco, the 800-pound gorilla in communications--unified or otherwise--reported earnings for its second quarter. Not surprisingly, the news wasn't upbeat, although it wasn't as harsh as some had expected.Overall revenue in the quarter declined 7.5% year-over-year to $9.1 billion, and net income was $1.5 billion, off 27% year over year. Product revenue declined year-over-year by 11% and, in what Cisco calls its "core product areas" -- switching and routing -- year-over-year revenue was down 23%. Unified Communications revenues also declined, but only by single-digits--down 5% year-over-year.

On the plus side, Cisco saw 10% year-over-year revenue growth in its services business, and the number of customers who have placed orders for Telepresence grew to 312, 65 of whom, according to Cisco, ordered the high-end video system during the quarter being reported.

Cisco's earnings report validates a lot of what we've been reporting in UC eWeekly and the programmatic choices we continue to make for VoiceCon Orlando. These include:

* In bad times, the strong get stronger: To be sure, Cisco is feeling the pinch in the business that built the company - switching and routing. That decline, however, reflects long-term technology trends that pre-date the economic and financial disaster that has been ongoing for most of the past year.

Cisco has moved aggressively into UC and consumer markets, it has expanded its carrier and services businesses and it is sitting on about $29 billion in cash to buy whatever hot newcomers come onto the scene and, for the foreseeable future, such purchases are likely to be at fire-sale prices. Obviously, the whole question of vendor viability will be one the main topics of conversation at VoiceCon.

* Enterprise spending on UC and IP Telephony has slowed, but the spigot is not shut off: Cisco plays fast and loose with the term "UC" rebranded its IP Telephony business as Unified Communications, so its reported UC revenues include both basic IP Telephony systems and the elements that comprise UC. And, like many of the other vendors, Cisco is bundling new UC functions into IP-PBX licenses, which further complicates determining how much revenue is being generated by UC vs. "traditional" IP-PBX solutions.

As to whether UC is being harder hit than the core IP-PBX market, the jury is still out. Some argue that the economic climate has created incentives for customers to push ahead on lower-cost, but high-impact UC projects at the expense of large IP-PBX procurements; others contend that UC has suffered, because most customers view it as more of a "nice to have" than a "need to have."

The fact that Cisco's UC revenues declined by only 5% suggests that it is expanding on the market-share gains it made in recent years. It also suggests that a considerable number of projects that were in the pipeline came to fruition in the quarter being reported, and that it may not have had to surrender much in terms of price. As the next quarters unfold, we'll see the extent to which Cisco--and the rest of the industry - can hold the line on UC revenues.

* Services and video, services and video: With ROI and TCO at the top of every buyer's agenda, it's not surprising that Cisco showed a pop in its services business. For one thing, like all vendors, Cisco now puts much more emphasis on this business than it has in the past. "Services" is a term that includes an ever-widening span of activities, from traditional pre- and post-sales offerings, to outsourcing, managing and hosting, with all kinds of variations on each.

Cisco also is at the forefront of promoting "Cloud Computing," and will participate in a first-time VoiceCon Summit examining the applicability of this emerging concept to enterprise communications. The VoiceCon Summit on Cloud Computing takes place Thurs, Apr 2.

Similarly, video can be a slam-dunk for reducing travel costs and so Cisco's growth in its Telepresence business is not surprising. To be sure, that growth remains off a very small base, and it by no means has the field to itself: Cisco's high-end Telepresence product competes against offerings from Polycom, Tandberg, HP and LifeSize, and there is an array of video architectures and price-points from which to choose.

In recognition of the growing role of and choices for video, we'll convene a special program at VoiceCon entitled "Strategies and Tactics for Enterprise Video," which will examine the topic from three critical perspectives - Product/Architecture, Network and Organizational Support. Led by Andrew Davis (Wainhouse Research) and John Bartlett (NetForecast), this program will run Mar 30-31.

Cisco is big, aggressive and diversified, and those characteristics help in both good and bad times. However, some of the competitors that have emerged in UC--notably Microsoft and IBM--share similar attributes, which ensures that the UC market battle is far from over. All of these competitors and more will be present at VoiceCon Orlando, and I hope you will be there too.