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Cisco boosts sales and profits despite softness in switching and routing

Servers and video help fill in the gaps

Cisco Systems took a big bet more than four years ago when it jumped into the server market with its Unified Computing System blade and rack servers and started peddling converged Nexus switches at the same time. Those bets have paid off, and rising sales of these products are filling in the revenue gaps in the quarter ended in April as switch sales are down and router revenues are flat.

In Cisco third quarter of fiscal 2013, product revenues were $9.56bn, up 5 per cent, and services revenues were $2.66bn, up 7 per cent. Research and development costs were on the rise, but Cisco kept a lid on other costs and therefore was able to boost net income by 14.5 per cent to $2.48bn.

The company boosted its dividend by 3 pennies to 17 cents a share in the quarter and paid out $1.8bn for dividends and share buybacks in the quarter and still ended up with $47.4bn in cash and equivalents in the bank, about a billion bucks lower than a year ago thanks to acquisitions.

"Bottom line, we did what we said we would," said CEO John Chambers in a conference call with Wall Street analysts going over the numbers on Wednesday after the market closed.

Switching continued to be the main revenue driver for Cisco, but sales fell by 2 per cent to just under $3.6bn in the April quarter. Nexus converged switches, which support server and storage protocols on the same ASICs, thus simplifying network configuration and cutting the costs of linking servers to each other, to storage, and to the outside world, had double-digit growth and Chambers said there was increasing demand for 10Gb/sec and 40Gb/sec networking.

Chambers said that the data center business, which means UCS servers and integrated switching as well as some related Nexus switch sales, had a 77 per cent jump in sales in the quarter, to $515m. He said that if you add up all Nexus switching plus UCS, then this modern Cisco business had an annualized run rate of $5.5bn as the April quarter came to a close. That is a 35 per cent increase over the run rate it had a year ago.

Routers had flat sales in the quarter, at $2.14bn, but service provider video product sales were up 30 per cent to $1.3bn. Collaboration tools brought in just over $1bn in the quarter and were down a point compared to the year-ago quarter, but wireless products had a 27 per cent spike to $523m.

On a geographic basis, southern Europe continues to be a problem, said Chambers, and revenues were flat across the entire EMEA region for Cisco in the quarter. The Americas region was up 7 per cent, driven by strong sales in the US at enterprises (sales up 10 percent) and service providers (up 10 per cent as well).

Even the public sector in the United States managed to grow 5 points, said Chambers. Asia/Pacific-Japan-China had 1 percent growth, which is not all that great, but emerging markets had 13 per cent growth, more than double the growth Cisco had in its second fiscal quarter ended in January. China posted 8 per cent growth, Russia was up 16 per cent, and Brazil was up 14 per cent.

Looking ahead, Cisco expects for revenues in its fourth quarter ending in July to rise by between 4 and 7 per cent, with non-GAAP earnings per share of 50 to 52 cents per share. GAAP EPS will be 7 to 10 cents lower than that. ®

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