Cisco Launches HyperFlex To Boost Flagging Data Center Fortune

  • Cisco has launched Hyperflex line of hyperconverged products aimed at the data center.
  • This comes after the company posted a worrying decline in its data center revenue.
  • Hyperflex will help Cisco gain exposure to a high-growth niche market and probably turn around its flagging data center fortunes.

During Cisco's (NASDAQ:CSCO) latest quarterly report, one of the worrying weak points that emerged was that the company’s data center segment, that has for several years been one of its fastest-growing, posted a worrying revenue decline. Cisco’s data center business posted revenue of $822M, down 3% Y/Y. This raised a red flag amongst the investment community because Cisco’s turnaround efforts hinged strongly on the data center business. Although Cisco blamed the decline on macroeconomic uncertainties that are forcing many IT departments to put off IT spending, there was another more suitable reason to blame for the situation: Cisco had not done a major refresh of its data center product line since the launch of its UCS (Unified Computing Systems) servers in 2009.

But now Cisco has launched the HyperFlex hyperconverged line of products in what the company is hailing as the biggest move since the launch of UCS. HyperFlex is essentially a line of integrated server/storage systems, also known as hyperconverged systems, that Cisco says can be easily set up in a matter of minutes and enable the user to independently scale server and storage capacity as they wish. HyperFlex is capable of supporting traditional hard drives and solid-state drives, or SSDs, as well as both blade and rack server nodes.

Despite the continued declines in the server/storage markets, the integrated systems market is still growing and is expected to grow at 5.2% CAGR from $7.2B in 2016 to $8.4B in 2019. The market for hyperconverged systems where hyperflex belongs is still a small sliver of the converged systems market. IDC estimated that the hyperconverged systems market was a $1.6B/year market in Q3 2015, but growing at a robust 65% clip. This market is thus expected to grow from $1.9B in 2016 to $4.8B in 2019.

CSCO-2

Source: ZD Net

Now that helps explain why Cisco trimmed its stake in VCE, a joint venture between Vmware (NYSE:VMW), Cisco, and EMC, from 35% to 10% in 2014. Although VCE was ranked as the leader in integrated systems with 27.8% share of the market in Q3, it’s increasingly facing competition from Hewlett Packard Enterprises' (NYSE:HPE) ConvergedSystem line, IBM's (NYSE:IBM) PureSystem line and Oracle's (NYSE:ORCL) engineered systems.

Top 3 Vendors, Worldwide Integrated Systems, Third Quarter of 2015 (Revenues are in Millions)
Vendor 3Q15 Revenue 3Q15 Market Share 3Q14 Revenue 3Q14 Market Share 3Q15/3Q14 Revenue Growth
1. VCE $442.81 27.8% $392.00 24.3% 12.96%
2. HP $357.46 22.5% $314.17 19.5% 13.78%
3. Oracle $339.51 21.3% $313.11 19.4% 8.43%
All Others $451.55 28.4% $594.90 36.8% -24.1%
Total Factory Value $1,591.35 100.0% $1614.18 100.0% -1.41%
Source: IDC Worldwide Converged Systems Tracker, December 21, 2015

Source: IDC

Hyperflex will, therefore, help Cisco exploit the high-growth hyperconverged niche market. Hyperflex will not be competing directly with Cisco’s FlexPod product line that the company sells jointly with NetApp (NASDAQ:NTAP) since FlexPod belongs to integrated systems and not hyperconverged systems.

FlexPod products are estimated to be on a $2B annual run-rate. Since Cisco owns roughly 50% stake in the FlexPod JV, it follows that the company’s integrated systems contribute ~30% to its data center revenues. Now Cisco has a chance to grow that even further by entering the high-growth hyperconverged systems market.

Cisco also announced a new line of Nexus 9000 data center switch line. Cisco’s SDN platform, ACI, is built around Nexus 9000. So the new refresh is aimed at keeping its ACI business competitive. Cisco recently said that ACI revenue had already crossed $2B annual run rate.

Investor Takeaway

Cisco’s latest product announcements appear aimed at keeping its data center product line fresh, which is critical after the segment recorded its first quarter of revenue decline. Hyperflex is a line of hyperconverged systems products that will help Cisco gain exposure in the small but high-growth hyperconverged systems market. If Hyperflex proves to be just as successful as UCS, then Cisco’s data center business and hence Cisco stock, will receive a new lease on life.

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