The Dark Clouds Over Cisco - Can Cisco Systems Reinvent Data Analysis?

By: Investment_U

Tom Sandford writes: A lot can change in 30 years of business, especially if the company is synonymous with the market segment.

Since its founding in 1984, Cisco Systems Inc. (Nasdaq: CSCO) has grown to be worth $47 billion, with 72,000 global employees. But as IT hardware demand falls victim to the cloud, the company is scrambling to recoup losses from its biggest moneymaker.

Will such a large company be able to do so while fighting off startups? Here’s what analysts think.

The Dark Clouds Over Cisco

For Cisco, year 30 hasn’t been the brightest. Profitability has fallen for five straight quarters.

Sales have declined in three of the last four quarters, and employees feel the pinch.

In August, Cisco cut 8% of its workforce, or 6,000 jobs, from the roster.

It’s been a tough lesson for a company who had regular double-digit growth in the 2000s thanks to hardware sales. But that was before the cloud came around.

Rather than buying Cisco’s proprietary hardware, former clientele are moving operations onto the cloud where hardware is managed by a third party. In addition, many have realized they can take care of their IT needs by buying commodity hardware loaded with complex software.

This hardware functions in the same vein, but without Cisco’s pricey name attached.

The shift from “branded IT” has been a big concern at Cisco, and played a part in a 25,000-person reorganization plan released in October. The shuffle aims at shaking up the company’s hardware business and switching engineering business.

That particular division was responsible for 60%, or $21.7 billion, of Cisco’s 2014 product revenue. The reorganization stirred a mini exodus among disgruntled employees, analysts say.

Even worse, some employees may have jumped ship to join up with Cisco’s younger competition. It wouldn’t be the first time, either.

The Startup Shakeup

One of the most prominent ex-Cisco employees who linked up with an IT rival was Dan Scheinman. He served as a Cisco general counsel in the ’90s.

Since then, he’s become a board member of IT startup Arista Networks Inc. (NYSE: ANET).

Arista went public in June and has been growing rapidly. But in Cisco’s opinion, Arista’s progress wasn’t earned.

In December, Cisco filed two complaints in federal court claiming infringement on 14 patents. The knowledge of these patents, Cisco claims, came directly from the knowledge of former employees.

The suit caused Arista’s stock to stumble down 15%, but it also caused a stir among Cisco’s critics. Some, like Scheinman, say the lawsuit is simply an attempt to drag down competitors.

Scheinman cited the fact that the Arista products the lawsuit mentions have been on the market for six years, but Cisco didn’t bother to file a suit until recently.

Aiming for the Internet

Cisco’s hardware business still remains an integral part of profit. In fact, Cisco just usurped Oracle Corp. (NYSE: ORCL) as the world’s fourth-biggest server supplier.

However, the company has shifted some attention to the “Internet of Things,” or “IoT,” movement. The movement describes a network of Internet-enabled smart devices that can provide instantaneous cost-saving info to businesses. Cisco CEO John Chambers estimates that the IoT will unlock $19 trillion in cost savings and new sales for companies in the coming decade.

And $7.3 trillion of that will be interpreted by data analysis software, he says. In December, Chambers unveiled eight industry-specific software packages that will help companies capture IoT insight.

The info will come via an array of sensors in cellphones, store cameras and even light fixtures. Each sensor gives companies that much more insight into consumer behavior and logistics.

By doing so, Cisco helps shift its dependence away from hardware. The move will instead help its services business, which has grown from 16% in 2007 to 23% in 2013.

Cisco also recently purchased Neohapsis, a tech company focused on mobile security and cloud operations. The deal is expected to grease the wheels in Cisco’s IoT operations while also making enterprise operations more secure.

But the company has plenty of competition brewing from companies like Apple Inc. (Nasdaq: AAPL) and IBM (NYSE: IBM).

Expect Cisco to continue its work to distance itself from hardware-heavy sales. But don’t look for an immediate turnover, especially as the IoT market isn’t expected to flare for some time. The lawsuit with Arista, however, could be a different matter.

Analysts familiar with patent and copyright infringement lawsuits say this one will most likely go to trial, as most involving competitors do. According to Network World, the trials could start as early as 16 months from now, according to past suits filed in the same California district.

Watch for which company comes out on top. Depending on the decision, Cisco could come out looking like the unfortunate victim or the corporate curmudgeon.

Source: http://www.investmentu.com/article/detail/41797/can-cisco-systems-reinvent-data-analysis#.VJ148pDpAg

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