Cisco might be down, but its fortunes (and market share) rise in the data center

When Cisco Systems (s CSCO) reported its fiscal fourth quarter of 2013 earnings Wednesday, the headline was: demand is slowing and the company was firing 4,000 people (out of a total headcount of over 75,000.) However, amongst all the gloom and doom was one bit of positive news: Cisco has gained further momentum in its data center cloud business. The irony is that, we have said the very same words – gloom & data center growth – before. And if Cisco chief financial officer Frank Calderoni is to be believed, it could stay red hot.
“Extremely bullish on the data center. I want to be careful in saying it will be our fastest big growth area for next year, but I feel very comfortable,” he told analysts during a conference call.  The data center segment had revenues of about $593 million – that is up 15 percent from fiscal third quarter of 2013 ($515 million) and a whopping 43 percent gain compared to the year-ago quarter when it sold about $415 million worth of stuff.
chambersCisco CEO John Chambers when discussing the earnings with Wall Street analysts said that the data center has already become “a $2 billion plus business in five years, growing revenue over 40 percent year-over-year in the most recent quarter, and we are not stopping.” What was more impressive was the quick growth the company has logged in the server business. “We are pleased to have moved into the number two position worldwide in the x86 Blade market with approximately 20 percent market share, something our peers would have considered impossible a few years ago,” Chambers boasted.
Cisco entered the data center server business in 2009 by rethinking what server could mean for the data center and its success shows that the company did get this right. It was right place at the right time as well — data center industry has been booming, thanks to a massive transition to cloud technology and mobile Internet.
server room picChambers’ remarks hint at further momentum for Cisco in the global server business. In the overall server market (of which x86 blades are a subset) Cisco was tied for the fourth spot with Oracle, and Fujitsu during the first three months of 2013, according to International Data Corporation, a Framingham, Mass-based market research company. IDC put Cisco’s market share at 4.1 percent of the worldwide server revenues and revenues of about $450 million. Cisco is betting on servers at a time when some of the traditional players are trying to rethink their approaches or simply trying to get out of the business.
That said, it is not just servers: even the data center switch demand is strong, the company said. Robert Lloyd, Cisco’s President of Development and Sales in response to a question added:

….if you looked at the data center portfolio of switching, obviously the Nexus portfolio has done very well. Growth in the Nexus this quarter was over 20 percent. We have a very good innovation pipeline. We’ve just now started to see the Nexus 6000, a new platform start to ramp quite nicely. Couple of weeks ago, we introduced the 7700, a 40 and a 100-gig switch for the data center, as well as 40-gig interfaces for the existing 7000. So, the portfolio was very, very strong there in addition to what we see happening with UCS. And actually I think architecturally, in the current environment, and as we shift to more of the application-centric opportunities in the future, I feel really good about the roadmap and great about our innovation.

PS: If you are interested in the transcript for Cisco’s earnings call for Q4 2013, visit Morningstar.