Cisco Fumbles $655 Million on Faulty Gear

Outlook for growth dims at the networking giant, but there are some bright spots.

By Sean Michael Kerner | Posted Feb 13, 2014
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Cisco had a tough fiscal second quarter, with declines in parts of its routing business and a large charge because of an issue with faulty components.

Cisco reported its second quarter fiscal 2014 earnings late Wednesday, with revenue coming in at $11.2 billion, a 7.8 percent year-over-year decline. Net Income was $1.4 billion, a 54.5 percent year-over-year drop.

Cisco's outlook wasn't great, either, with third quarter revenues expected to decline in the range of 6-8 percent.

A key contributor to Cisco's net income decline was a one-time charge incurred by the company. Cisco CFO Frank Calderoni said during the company's earnings call that the charge of $655 million is due to the expected cost of remediation of issues with memory components in some products sold in prior years.

Calderoni said the memory components in question were manufactured by a single supplier between 2005 and 2010.

"Although the majority of these products are beyond Cisco's warranty terms and the failure rates are low, Cisco is proactively working with customers on mitigation," Calderoni said. "This results in a charge to product cost of sales during the second quarter fiscal 2014."

The product charge isn't the only challenge that Cisco faced in the second quarter. Cisco CEO John Chambers noted that service provider orders declined 12 percent year-over-year, with service provider video orders, including set-top boxes, down 20 percent.

Chambers also said that Cisco's next-generation routing business saw a year-over-year revenue decline of 11 percent and wireless revenues declined by 4 percent.

There is at least one bright spot in the Cisco wireless portfolio, the Meraki platform that Cisco acquired for $1.2 billion in November of 2012.

"Cisco's cloud networking platform, Meraki, continues to perform very well, growing over 100 percent year-over-year and more than doubling customers from 4,300 one quarter ago to 9,600 in this quarter, due largely to the power of the Cisco channel," Chambers said.

Cisco also grew its security business, with revenue up by 17 percent. Part of Cisco's growing security business is its new Sourcefire business. Cisco acquired Sourcefire for $2.7 billion in 2013.

"The Sourcefire acquisition continues to perform very well, and there is no question that the Sourcefire acquisition has accelerated our position as a leading security company, and in our view, the only one capable of delivering an end-to-end architectural approach," Chambers said. "We are very pleased with the performance of both Meraki and Sourcefire acquisitions as part of our build, buy and partner innovation strategy."

Photo courtesy of Shutterstock.

Sean Michael Kerner is a senior editor at Enterprise Networking Planet and InternetNews.com. Follow him on Twitter @TechJournalist

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