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Cisco turns in solid June quarter

Jacks up dividend, buybacks despite cautious CEOs

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Networking giant and server upstart Cisco Systems hit the numbers between the eyes in its fourth quarter of fiscal 2012 ended in June, growing profits faster than revenues.

The company's financial performance, despite intense competition, soft markets in many places around the globe, and skittish CEOs who are not sure how the rest of 2012 and 2013 will play out, is strong enough that the company is boosting its relatively new dividend.

In the June quarter, Cisco had $9.15bn in product sales, up 2.6 per cent, and $2.54bn in services revenues, up a much more healthy 11.7 percent. By curbing sales, marketing, research, and development costs, and in spite of rising back office costs, Cisco was able to boost net income by 55.6 per cent to $1.92bn.

Of course, in the year ago period, Cisco also booked $768m in restructuring charges, which made for an easier compare with only $79m in such charges this time around.

For the full fiscal year, Cisco posted revenues of $46.1bn, up 6.6 per cent, and brought just a tad bit over $10bn to the bottom line, an increase of 10.9 per cent. That met Cisco's goal after its restructuring to grow profits faster than revenues as it focuses on its key switching, routing, and collaboration businesses, while growing its Unified Computing System server sales.

In the quarter, Cisco's switching business was flat with sales of $3.6bn, and in a call with Wall Street analysts, CEO John Chambers said that the company felt pretty good about its core switching, routing, and security products.

Fixed switch sales rose 6 per cent, while modular switch revenues fell 3 per cent.

The Nexus 2000 and 5000 converged rack switches, which are intended to carry both server and storage traffic over a 10 Gigabit Ethernet backbone, were up more than 24 per cent in the quarter, and the Nexus 7000 end-of-row aggregation switches posted a sales bump of 13 per cent.

Sales of older switching products outside of the Nexus family saw declines, as expected, as customers shifted to Nexus gear. Perhaps more importantly, the margins on the Nexus 7000s have improved by 10 points in the past eight quarters, helping bolster Cisco's profits like the older Catalyst switches used to do before convergence.

Cisco posted revenues of $2.1bn for its various routing products, up 4 per cent as service providers continue to build out their networks around the globe.

For the full year, Cisco had $14.5bn in switching sales (up 3 per cent) and routing sales of $8.43bn (up 2 per cent).

Service provider video products, which include a mix of hardware and software, fell 2 per cent, and collaboration product sales took an 8 per cent hit as governments around the world pulled back on spending on telepresence products. In Europe, companies and governments alike did so, too.

Wireless switch and related product sales were up 22 per cent, to $494m, and security product sales were another bright spot, rising 8 per cent to $350m.

The data center lineup at Cisco, which includes the UCS machines as well as the Nexus 1000v virtual switch (with over 6,000 customers), nearly doubled sales with a 90 per cent bump to $415m. Chambers said on the call that UCS product bookings were up 58 per cent in the quarter, and that order growth through the Virtual Computing Environment (VCE) sales partnership it has with EMC and its virtualization minion, VMware, rose in tandem by 58 per cent.

For the full fiscal year, Cisco's data center products had $1.3bn in sales, up 87 per cent. UCS has definitely gotten a toe-hold in the data center, particularly among companies building shiny new private clouds.

Despite some of the gloom on the numbers, Chambers said there were some signs for optimism. But he also cautioned that the CEOs that he is talking to are saying that they expect a challenging economic environment over the next twelve months, and Cisco itself is also anticipating that global public spending is going to be under pressure in the next year.

The optimism has to do with a pickup in spending in certain areas sequentially. For instance, in the United States, spending among state and local governments, which have been slashing jobs like crazy since the Great Recession started, was up 7 per cent in the third fiscal quarter ended in March and rose 17 per cent in the fourth fiscal quarter ended in June.

Enterprises in the United States boosted their spending at Cisco by 1 per cent in Q3, and 4 per cent in Q4, and on a global basis, enterprises cut spending by 1 per cent at Cisco in the aggregate in Q3, but jumped 6 per cent in Q4.

Chambers is not ready to call this a trend yet, but he did want to point out the good news to Wall Street, even as he explained that spending by public institutions at Cisco had slowed, stalled, and then declined as fiscal 2012 rolled on, and that he did not expect it to stop declining for a while yet.

In the latest quarter, Cisco's sales in the Americas rose 4 per cent and Asia-Pacific/Japan/China had 12 per cent growth. But EMEA was off 6 per cent. Sales to enterprises across the globe rose by 6 per cent, public sector spending was up 1 per cent (thanks to state and local governments), commercial sales were up 4 per cent, and service provider sales were off 1 per cent.

Looking ahead to the first quarter of fiscal 2013 ending in September, Cisco anticipates it can grow sales by between 2 to 4 per cent and that it can bring in earnings per share of between 45 and 47 cents, which represents 5 to 9 per cent growth year on year. That's not huge growth, and Cisco is unapologetically being conservative with its guidance given all of the uncertainties out there.

That said, Cisco is confident enough about its prospects for the future to raise its dividend by 75 per cent, from 8 cents to 14 cents, and to tell Wall Street that it will allocated at least 50 per cent of free cash flow to share buybacks and dividends going forward.

Cisco first started paying a dividend in fiscal 2012, and spent $1.5bn sending checks to shareholders. The company also spent $4.36bn on stock buybacks in fiscal 2012, and currently has $5.9bn in share repurchases authorized from the board still available.

Cisco has $6bn in cash in the bank derived from US operations, and according to CFO Frank Calderoni, buybacks and dividends must be paid with US cash. Cisco has $9.8bn in total cash in the bank plus another $38.9bn locked up in investments that it could liquidate to do acquisitions, or to pay for dividends and buybacks if it so chose. ®

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