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Cisco to 'power through' tough fiscal 2011

Governments, service providers, and Europe pull back

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Networking giant and server wannabe Cisco Systems gave Wall Street another shock when it said its orders fell short by more than $500m in the first quarter of fiscal 2011, holding revenues down to $10.75bn.

When announcing its financial results on Wednesday for the quarter that ended on October 30, Cisco also warned that its growth will be less than expected in the next couple of quarters and downright anemic in the second fiscal quarter.

Revenues in the first quarter were up 19.2 per cent compared to the year-ago period. But net income was only up eight per cent, to $1.9bn — which is not great.

And worse still, Cisco's chief financial officer Frank Calderoni said when giving guidance for the second fiscal quarter ending in January 2011, that revenue is projected to grow only by three to five per cent. And to help cushion that blow, Cisco did something a bit unusual: it actually gave out full-year guidance for fiscal 2011, saying that it is expecting sales to grow by between nine and 12 per cent for the full year.

That's well below the target Cisco had set for itself, but that's business in a choppy economy.

John Chambers, chief executive officer and chairman, said the public sector - where the company gets about a quarter of its business globally - was a challenge during the quarter. So was the service-provider business in the US, with cable operators in particular being stingy with their dollars.

Business in Europe was also impacted as governments there are slashing their budgets, and the economies are not doing great in many countries. Chambers did say, however, that business was good in France, Germany, the Netherlands, and the Nordic countries.

Chambers, as always, took the long view and remained upbeat even as he was clearly disappointed with the results in Q1 and the prognostications for weaker-than-usual growth for the next fiscal year.

"Barring a surprise — which is always possible — and given the appropriate caveats, it is not unreasonable to return to 12 to 17 per cent growth goals in the not too distant future," Chambers said on the call with Wall Street analysts. "Our view is that we are going to power through."

Well, it wasn't like we were expecting Cisco to give up and sell itself to Oracle or IBM at a discount.

In the first quarter, Cisco's product revenues rose by 20.8 per cent to $8.7bn, while its services grew by a more modest 12.6 per cent to $2.05bn. Switching product revenues were $3.6bn, up 25 per cent, with balanced growth for both modular and fixed switches. Routers accounted for $1.8bn in revenues, up only 13 per cent, while the new-technology areas (a reclassification of what Cisco used to call advanced technologies) had $3.1bn in revenues, up 22 per cent compared to the year-ago period.

The new-technologies area includes data center products (including the Unified Computing System blade and rack servers and storage arrays), collaboration tools, security products, wireless devices, and home video. Other products, which fall outside of these categories and include optical gear and a few other items, accounted for $231m in revenues, an increase of 13 per cent.

Within the new-technologies area, the UCS products have taken off like a rocket, according to Chambers, growing more than 550 per cent, and are now at an annualized run rate approaching $500m. Chambers said that the UCS customer base was 2,800 as the quarter ended, up from 900 in the third quarter of fiscal 2010 and from 1,700 in the fourth quarter. He added Cisco has more than 40 customers that have bought more than $1m in UCS products, and that many of them are moving out of proof-of-concept and into production phase.

As such, Cisco is eagerly anticipating a massive uptake in its servers and integrated switches. Chambers said Cisco itself has 2,500 UCS servers installed in its own data centers and said that they were "rock solid." The overall data center product line saw 59 per cent growth in the quarter, so not everything in that mix is growing at the same rates as UCS.

Cisco said there are 62 accounts that are putting the Vblock preconfigured UCS server–EMC storage–VMware virtualization stacks into the field, with some of them going into production. These products are sold through the Acadia partnership, which was announced a year ago.

Chambers called out a few other leading-edge products that helped Cisco grow in Q1. He said the ASR family of edge routers saw 200 per cent growth and are now at an annual run rate approaching $1.4bn, while Nexus converged edge and core switches had 120 per cent growth and are at a $1.5bn run rate. The ISR routers saw 125 per cent growth, and are running at $1.2bn a year, while the MDS switches and directors had 24 per cent growth and are running at around $500m a year.

By geography, sales in North America rose only by seven per cent to $5.88bn, and Europe had only two per cent growth to $2.02bn. Asia/Pacific (which now includes Japan, unlike last year) had 18 per cent growth (thanks mostly to India and China) to $1.64bn, and the emerging markets showed 32 per cent growth to $1.22bn.

In its first quarter, Cisco's sales to large enterprise customers rose by 16 per cent, while sales in the public sector were up only by six per cent, and among service providers only by eight per cent. Sales to smaller companies were up 13 per cent, and consumer sales were flat.

Cisco had $38.9bn in cash and equivalents as the quarter ended, up $1.7bn. It has 72,805 employees, and Chambers said the company had added 1,891 employees in the quarter and would continue to hire people to grow its adjacent businesses outside of switching and routing. For instance, in the past two quarters, Cisco has added more than 600 sales people to push new products. ®

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