Why Cisco CEO Chuck Robbins Anticipated a ‘Pause’
Cisco’s core business of selling data center switches and routers continues to slump as the company refocuses on software.
Overall sales fell 4% year-over-year to $12 billion during its fiscal fourth quarter. The company’s seventh consecutive drop in quarterly revenue was primarily a consequence of weakness in its switching and routing businesses, sales for both of which fell 9% year-over-year to $3.4 billion and $1.9 billion, respectively.
Still, Cisco (CSCO) CEO Chuck Robbins told analysts during a conference call on Wednesday that the switching decline was “not a surprise to us.” This is despite the company debuting new switches in June that Cisco bills as its future cash cow and that require customers to subscribe to for additional features, like security software that can spot malware in encrypted networks.
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The goal is to create more recurring sales, much like Microsoft’s (MSFT) Office 365 business software that comes with a monthly or annual fee. Subscriptions are a big shift that Cisco hopes will eventually help return growth to its core switching business.
But Robbins acknowledged that it will take time to convince customers to buy the new switches and then pay even more for the extra software services.
“Anytime we do a major platform announcement, particularly in switching, there is a period of time when our customer’s pause,” Robbins told analysts. “We did see a pause and anticipated it.”
For some customers, Cisco’s product revamp along with the selling software subscriptions has put them in a wait-and-see mode. Not only would they have to pay newly recurring fees, some services include more advanced features that they would have to decipher and then integrate with their existing IT infrastructure.
The complexities are too much to handle for some businesses.
In an interview with Fortune, Robbins described the apprehension as temporary and that customers are merely saying, “Let me understand how we think about the architecture” before committing.
He said 200 customers have bought the new switches, and that a “large majority” of those are also subscribing to the additional software services.
Robbins was hesitant to say when the new switching products would lift sales, but he said it “typically takes three years” for completely revamped gear to make a significant impact. That said, there’s a lot of “emotional momentum” within Cisco for the new products, and Robbins is hoping that the positive attitude will lead to faster sales.
In any case, Robbins argued that the new products only debuted a few months ago, and that there’s still plenty of time for Cisco to convince customers to buy them. And he expects the company to succeed more quickly in achieving that than the three-year norm.
“We would like to believe we can accelerate that,” Robbins told analysts.