Cisco's turn around strategy is working, but for how long?

Networking-equipment-maker Cisco Systems said its fiscal second-quarter revenue and profit gains illustrate that its turnaround strategy and internal revamp are working. The vendor reported a 43.5% increase in net income for the quarter and revenue improvement of about 11%, higher than its forecast. “We believe our vision and strategy are working,” said CEO John Chambers.  “We are executing well on our three-year plan to drive earnings faster than revenue. We hit our billion-dollar expense reduction a quarter early,” he added.

Cisco slowed down its usually aggressive acquisition activity during the slump but is now back in the game, Chambers said. The company’s ideal buyout target remains the same:  a company with about 100 engineers and a product about to come to market.   They are especially interested in companies that Cisco’s customers recommend for acquisition.

The company’s revenue from its flagship products – routing and switching revenue each grew, but by only 8 percent to $3.6 billion and $2.1 billion, respectively.  Service-provider video infrastructure, another key focus at Cisco, saw revenue grow 23 percent.   The UCS (Unified Computing System) of Cisco’s business grew significantly in the second quarter, with revenue up 91 percent from a year earlier and an accumulated customer count of 10,763.  With both these servers and the Nexus line of switches, Cisco expects to gain ground in data centers because of virtualization and cloud strategies, Chambers said. The line will blur between servers, networks and storage, which Cisco is addressing through its partnership with EMC and VMware, Chambers said.  Overall, data-center revenue was up 88 percent.

Much of Cisco’s revenue growth in the second period again came from new product lines. The company’s collaboration business, which includes high-end Telepresence videoconferencing systems, was up 10% to $1 billion. Revenue in the group that sells set-top boxes to cable companies grew 23% also to $1 billion.  For the current quarter, Cisco forecast revenue growth of 5 percent to 7 percent and non-GAAP earnings of $0.45 to $0.47 per share.

During the earnings conference call, Mr. Chambers stated,

“The major transitions from an information technology to business technology are accelerating in our enterprise, service provider, public sector and commercial accounts, and across most industries and geographies. Although we are only in the early stages of this transformation, our ability to use innovative solutions and intelligent networks to enable our customers to achieve their goals and their growth, productivity, cost savings, new consumption and business models is increasing and achieving increased customer acceptance.

These are, in many ways, unusual times. On one hand, the business feels good. The demand for Cisco products and services is healthy, and our relationship with our customers are the strongest they have ever been. On the other hand, there is significant uncertainty in the broader macro environment, and as such, it is prudent for us to remain conservative in our outlook for the second half of the fiscal year. For the remainder of FY ’12, you can expect us to make the required investments to advance our market leadership and drive innovation while holding to our financial model.”

“This is a validation of their turnaround strategy,” said Brian Marshall, an analyst at ISI Group. Still, he said that after a tough year, the results put Cisco back where it should be.

More info at:  http://online.wsj.com/article/SB10001424052970204136404577211462177287688.html?mod=dist_smartbrief

Transcript of earnings call at:  http://seekingalpha.com/article/352431-cisco-systems-ceo-discusses-q2-2012-results-earnings-call-transcript

Comment:  While the Cisco’s refocus efforts paid off big in the 2nd quarter, we wonder how the  slowdown in global government tech spending and conservative European tech budgets will effect future results.

 

0 thoughts on “Cisco's turn around strategy is working, but for how long?

  1. Great summary of Cisco’s turn around. But I wonder if they need new leadership to compete in a much more competitive networking business.

    With the exception of routers and switches Cisco seems to have exited all telco network equipment markets and have no products or services for mobile(3G/4G), or fixed broadband wireless (other than WiFi).

  2. It’s interesting that just a couple of days after their earnings announcement which you summarized so well, Alan, Cisco makes this announcement about its cloud-based business solution that helps a business’ employees share and collaborate across multiple media. In this case, Cisco chose to highlight Virgin Media, a company with a reputation for being innovative and a disruptor.

    http://www.marketwire.com/press-release/Virgin-Media-Enables-Flexible-Working-With-Cisco-Quad-Collaboration-Software-NASDAQ-CSCO-1618620.htm

    The description of what Cisco is providing to Virgin Media sounds like the type of products that Google or Microsoft would typically provide to businesses. Like Google and Microsoft, Cisco certainly has a brand that a Fortune 500 purchasing agent would trust. If Cisco can create some sort of compelling bundle with its network and storage products, perhaps that will give it an edge.

  3. After spending $Billions on many failed optical networking (transport & OEO switching) acqusions in the late 1990s-early 2000s, Cisco has now gotten back into this market via acquisitions. Evidently, the company wants to properly position itself to handle the tremendous amount of Internet & cloud computing traffic it expects in the next few years.

    The Cisco Visual Networking Index (VNI) Forecast, 2010-2015 projects that global Internet traffic will increase more than fourfold to 767 exabytes, or more than 3/4th a Zettabyte, by 2015. This amount is 100 exabytes higher than the projected level in 2013, or an increase the equivalent of 10 times all the traffic traversing IP NGNs in 2008.

    1. Long haul 100Gb/sec DWDM transport

    http://www.marketwatch.com/story/cisco-first-to-deliver-100g-at-3000-km-distances-without-need-for-regeneration-2012-02-22?reflink=MW_news_stmp

    2. Cisco Announces Intent to Acquire Lightwire

    Lightwire develops advanced optical interconnect technology for high-speed networking applications. The acquisition will allow Cisco to deliver cost-effective, high-speed networks with the next generation of optical connectivity, allowing service provider and data center customers to meet the growing demands of video, data, voice, mobility and cloud services.

    http://newsroom.cisco.com/press-release-content?type=webcontent&articleId=675179

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