Cisco profits up, margins and shares down

Cisco beat analyst estimates with its second-quarter earnings, posting revenue of US$10.4 billion and earnings per share, excluding expenses, charges and other items, of $0.37.

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Cisco beat analyst estimates with its second-quarter earnings, posting revenue of $10.4 billion and earnings per share, excluding expenses, charges and other items, of $0.37.

Consensus analyst estimates from Thomson Reuters were for Cisco to record revenue of $10.24 billion (£6.4 billion) and adjusted earnings per share of $0.35.

Revenue was up 6 percent from the second quarter of Cisco's fiscal 2010 but EPS was down 8 percent. Three months ago, Cisco warned that second-quarter results would fall short of expectations due to softness in some key vertical and geographic markets.

Net income, on an adjusted basis, was $2.1 billion in the second quarter.

"The quarter played out as we expected. Our strategy of tightly integrating our multiple products through an architectural approach is working, and we are delivering innovation in each major product family," said John Chambers, Cisco chairman and CEO, in a statement. "As a company, we are going through a period of transition as we move aggressively in the market with our architectural strategy. We have managed these market transitions many times, positioning Cisco and our customers for success. Simply put, we are owning our evolution and the next generation of industry leadership."

Total product revenue was $8.2 billion in the quarter, up 3 percent from last year's second quarter. Routing was up 4 percent from last year while switching was down 7 percent.

Chambers attributed switching's performance to product transitions Cisco is currently managing.

"We're in the middle of major product transitions" such as the Catalyst 6000 line to the Nexus 7000 platform, he said in a conference call with analysts. "There are pricing pressures on our existing portfolio. But we will own the transition and the next evolution in this space. We have managed product transitions many times" over the years.

Product orders grew 8 percent from last year's second quarter. Enterprise order growth was in the high 20s, Chambers said.

Data center was a highlight in the quarter, and accounted for 59 percent of Cisco's product revenue. Cisco landed 40 new data center customers in the quarter, double that of the first quarter, Chambers said.

Thirty-nine percent of product revenue was from new product categories, he said. Collaboration is one such category, and it is on a $4 billion run rate, Chambers said.

Other strong areas in the quarter were service provider, commercial and emerging markets. Weak areas were public sector, set-top boxes, and consumer products. Order growth in the public sector will be "challenged" in the coming quarters, Chambers said.

Consumers are focused on "lower value" products instead of Cisco's more sophisticated gear, company officials said during the conference call. Consumer business is 2 percent of Cisco's overall revenue.

Net sales for the first six months of fiscal 2011 were $21.2 billion, compared with $18.8 billion for the first six months of fiscal 2010. Adjusted net income for the first six months of fiscal 2011 was flat at $4.5 billion, or $0.80 per share, compared with $4.5 billion, or $0.76 per share, for the first six months of fiscal 2010.

For the third quarter, Cisco guided to revenue 4 percent to 6 percent higher than last year's third quarter, which is within analyst estimates. Adjusted earnings per share, however, are forecast to be $0.35 to $0.38, a penny less than analyst expectations and off as much as 16 percent from last year.

"When we look back [on these quarters] we will wish we could have avoided it. But it will make us stronger," Chambers said of the lackluster, by Cisco's standards, performance. "Our strategy is right on course. Our timing is solid on market transitions. But we need to execute better and align our execution with our strategy and vision."

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