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Cisco optimistic despite 'unusual conservatism' in Q4

Customers' nervousness rubs off

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Wall Street might be a little disappointed but Cisco Systems' unflappable and eternally optimistic chief executive made no apologies for 27 per cent revenue growth, to $10.8bn, and net earnings of $1.94bn, up 79 per cent in the latest quarter.

That solid fourth quarter helped Cisco break through the $40bn revenue barrier by a smidgen, with sales up 10.9 per cent. For the fiscal 2010 year, Cisco brought $7.8bn to the bottom line, up 26.6 per cent compared to fiscal 2009.

The company exited the financial year with $39.9bn in cash and equivalents, $11.1bn in deferred revenues, a completely revamped switching and routing product line, a growing server operation and expanding businesses in adjacent markets.

Having said all that, Chambers admitted on a call with Wall Street analysts that they are getting mixed signals. Customers in June "took their foot off the gas pedal" but in mid-July "put it right back down" in reaction to bumpiness in the economy this summer.

The speed of the change was a bit surprising, said Chambers. And he said Cisco continues to model conservatively as it looks ahead to fiscal 2011 and beyond. He reiterated revenue growth of 12 to 17 per cent - Cisco's goal for years - is what he's planning for.

"We feel good about the factors we can control and influence," explained Chambers. "However, balancing this strong optimism, there are some challenges that are contributing to an unusual amount of conservatism and even caution" among Cisco's customers.

"When the customers get nervous, I get nervous," Chambers said, adding that many of CEOs and CIOs feel like Chambers that, their particular business feels good but they are worried about the macroeconomic weather.

In fiscal Q4, Cisco had $8.81bn in product sales (up 30.9 per cent) and just over $2bn in services revenues (up 12.3 per cent). Routers accounted for $1.7bn in the quarter, increasing 15 per cent from the year-ago quarter, with switches hitting $3.6bn, up 27 per cent.

Advanced technologies, which includes a whole slew of Cisco stuff, saw 27 per cent growth as well in Q4, hitting $2.6bn, and other products accounted for $940m in revenues, up 139 percent. This other category included the Tandberg video conferencing as well as Flip camera products, and interestingly, the combination of Tandberg and Cisco's existing telepresence products posted a 40 per cent increase in product orders, to $370m.

Chambers provided a little color on specific products in his comments, saying that CRS carrier routers grew by 20 per cent and now have a run rate of $1.2bn, that ASR aggregation routers showed 150 per cent growth and has a run rate of $1bn, and that Nexus converged switches saw a 325 per cent growth and now have a run rate of over $2bn.

The Unified Computing System blade and rack server line that Cisco launched in March 2009 now has 1,700 customers, up 90 per cent sequentially from the fiscal third quarter. Chambers did not provide shipment numbers or revenue run rates. He did say that in the coming year, Cisco expects to take down some very big deals with the UCS iron.

By geography, sales showed the same balance as product revenues did across the Cisco product catalog, with some wiggling here and there.

The US and Canada had $5.9bn in revenues in Q4, up 24 per cent, while Europe posted $2.2bn in revenues, up 29 per cent (and a bit stronger than expected, given the economic turmoil in some European countries). Asia/Pacific had 23 per cent growth in Q4, to $1.2bn, and Japan was wiggled up by 7 per cent, to around $400m. Emerging markets outside these regions grew 57 per cent, to $1.3bn.

Chambers singled out India and Switzerland, with more than 50 per cent product order growth each in Q4, for kudos. Canada and Brazil had order growth of more than 40 per cent growth each; and Australia, France, and Russia showed 30 per cent or higher order growth. China, the US, the UK, and the Netherlands were relative laggards, with between 20 and 30 per cent product order growth in Q4; Italy and Germany were stuck in the single-digit doldrums.

For the full year, Cisco's router products raked in $6.6bn, up only four per cent, and switches hit $13.6bn, up 12 per cent. Services revenues rose by nine per cent, to $7.6bn, while the advanced technologies hodge-podge had $9.6bn in sales, up a not-so-impressive six per cent. Other revenues spiked up 64 per cent, to $2.6bn.

You can see now why Chambers talks constantly about moving into 30 adjacent markets where Cisco already plays in the IT space. There's a limit to how much growing Cisco can do in its core switching and routing areas.

Looking ahead to fiscal 2011, Cisco says to expect non-GAAP revenues to rise by 18 to 20 per cent, which is still above its long-term goal for the company but obviously shy of the quarter just ended.

Cisco added 2,000 employees in Q4 of fiscal 2010 and expects to add about 3,000 more in fiscal 2011 - these do not include employees that came to Cisco by virtue of acquisitions. Cisco ended the fiscal year with 70,714 employees, up from 65,545 a year ago. ®

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