Cisco Is 'Walking Away' From Low-Margin Set-Top Deals: Chambers

Cisco Systems, which saw sales to service providers worldwide fall 1% for the quarter that ended Jan. 26, is now “walking away” from bids for low-margin set-top boxes, particularly in Europe, chairman and CEO John Chambers said on the company’s earnings call Wednesday.

“We are driving the transition to more software video solutions and have been more selective in the business we are taking in terms of set-top boxes, and the lowest margin set-top box business in particular,” Chambers said.

Set-top box revenue in Europe was down “dramatically” because of the shift in focus, Chambers said: “If it’s purely a bid that is on very, very poor margins, we are not even going to bid.”

Cisco’s service provider video segment revenue for the quarter was $1.22 billion, up 20% versus the year-earlier period. However, that was entirely attributable to the acquisition of NDS, which Cisco closed in July 2012, according to Chambers.

"The integration of NDS continues to go very well, driving results on both the top and bottom line,” Chambers said. "We continue to drive a transition in our service provider video business, driven by the integration of NDS evolving from low-margin set-top box business to more of a profitable and strategic Videoscape architecture in the cloud.”

Chambers said Cisco’s service provider market position remains strong, citing new deals with AT&T and Cox Communications in the most recent quarter.

“The service provider sector is largely deal driven,” Chambers told analysts. “Our relationship with service providers is excellent -- it’s just lumpy.”

It’s not unusual for Cisco to receive a $100 million order from a service provider in a given quarter, which may represent half its business with the vendor for the year, Chambers said. “We’ll get a our fair share of spend, and then some,” he said, citing as major customer accounts Comcast, Time Warner Cable, AT&T, Verizon and Sprint.

Cisco saw good growth in its service provider Wi-Fi line of business, with revenue doubling year over year, Chambers said. “A few years ago, we were, candidly, behind in wireless... and today are in a strong market-leadership position,” he said.

Over all for the quarter, Cisco posted revenue of $12.1 billion (up 5% year over year) and net income of $3.1 billion, or $0.59 per share, up 44% from $2.2 billion in the year-earlier period.

On Jan. 24, Belkin announced its intent to acquire Cisco's Linksys home-router business for an undisclosed amount. Cisco said the Linksys unit represented roughly 1% of its revenue, or slightly below $100 million for the quarter. The networking giant had acquired Linksys in 2003 for $500 million.