John Chambers, Chairman and CEO of Cisco, has suggested that the company’s set-top box business has adversely affected its profitability and that transitioning customers to cloud-based technology will address the problem.
In an earnings call to discuss Cisco’s Fourth Quarter and Fiscal Year 2013 Financial Results, Chambers said that the problem in its service provider business was in the cable set-top boxes and the cable companies. “Our business was down Q3 to Q4 about 40 per cent; usually Q3 to Q4 goes up comfortably. This is part of our focus on profitable set-top boxes in the market that is becoming very tough, almost commodity like. We [have] got to be able to fix set-top box business and migrate it to the cloud and implement it very successfully within that,” he said.
According to Chambers, the results demonstrate the mixed nature of the market. “In technology areas we’re seeing switching and data centre strength offset by routing and set-top box weakness. In customer segments we see public sector moment offset by softness this quarter in enterprise. In geographies we see improvement in the EMEA and Europe if you will offset by weakness in APJC.”
He told analysts: “In terms of the set-top-boxes, it’s a big market for us, not real profitable, which is one of the reasons you have seen how profitability do very well. At the same time even though, our revenues have dropped off. The volume literally Q3 to Q4 as I said earlier was down 40 per cent in terms of the run rate. In terms of the transition, the customers, none of them are completely into the cloud yet and a lot of them are in between. And so this will be a transition over the next three to five years, a lot depends on how quickly we can help our customer’s transition through that and how they get their business models set up effectively on it. So, we continue to model in our expectations, the set-top box is coming down. There might be quarters where we have a profitable deal or an emerging market deal that we go after by continuing to come down it to $2 billion base,” he explained.
In February 2013, Cisco executives had to clarify the company’s commitment to its set-top box business in the wake of comments made in an analyst call by Chambers suggesting that it was “walking away” from low-margin STB business.
Joe Chow, Vice President and General Manager, Connected Devices Business Unit wrote in a blog that: “Cisco remains committed to providing world-class managed customer premise equipment (CPE), which includes digital set-tops, intelligent media gateways and other devices. CPE is an integral part of Cisco’s end-to-end Videoscape TV services delivery platform. For emerging markets, CPE enables Cisco to offer a complete end-to-end solution for new customers as they launch and grow their digital platforms. For customers with more advanced video platforms and in more advanced video markets, CPE provides a key strategic advantage and opportunity for Cisco.”
He said that Cisco’s investment focus continued to shift toward intelligent video and data gateways, which would allow its customers to accelerate their migration to new video architectures and next generation customer experiences. “As service providers migrate to these new architectures, the need for basic, traditional set-tops will reduce over time. While Cisco continues to offer traditional set-top products as part of an end-to-end portfolio and solutions for key customers, Cisco has made the decision to walk away from lower margin set-top box opportunities where we are not delivering value as part of a more holistic video solution,” he confirmed.
“For the emerging markets that are launching and expanding their digital footprint, Cisco will continue to support strategic opportunities for traditional set-tops that will drive the growth of digital video. Cisco has and will continue to evaluate each opportunity based on our business objectives. When warranted, Cisco will continue to support these opportunities as a step in the migration to a gateway/client and cloud-based solution,” he concluded.