Cisco Switching It Up as Recovery Takes Hold

What's at the core of Cisco earnings growth? Look no further than its core business.

By Sean Michael Kerner | Posted Feb 4, 2010
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The global economic recovery, at least in terms of network spending, is just around the corner -- according to networking giant Cisco Systems, that is.

Cisco reported positive revenue and earnings growth for its second fiscal quarter of 2010, beating its own earlier guidance as well as analyst expectations.

Though Cisco operates across multiple market segments including networking, collaboration and consumer electronics, it's switching that remains the core of its business, and the heart of its most recent growth.

"I think what you're seeing is that switches are often tied to success in the enterprise, government, and commercial markets, all of which went well for us on a global basis," Cisco CEO John Chambers said during his company's earnings call. "As you do collaboration and as video starts to take off, most customers are looking at switches more than just a concentrator for one element of that. It is the base on which we build our strategies for collaboration, security, video strategies and integration strategies."

For the second quarter of fiscal 2010, Cisco reported net revenues of $9.8 billion, which is an 8 percent year-over-year increase, double what Cisco itself had forecast in the first quarter and ahead of Wall Street expectations. Net income rose by 23 percent before charges, growing to $1.9 billion or $0.32 per share. Moving forward, Cisco provided third-quarter fiscal 2010 revenue guidance of 23 to 26 percent growth from last year's $8.2 billion in net sales.

Leading the way for Cisco's quarter was its switching business, with quarterly revenues of $3.4 billion -- up by 13 percent from the previous year. On a sequential Q1-to-Q2 basis, Cisco's switching revenue grew by 19 percent.

Cisco CFO Frank Calderoni noted on the company's earning call that the sequential growth in switching was Cisco's highest quarter-to-quarter growth in switching revenue in more than a decade.

In particular, Chambers singled out two key switching platforms that has strong growth.

"The Nexus 5000 and 7000 showed extremely strong year-over-year improvements as their customer acceptance dramatically increased, with revenue growth of approximately 450 percent for the Nexus 5000 year-over-year, and 140 percent for the 7000," Chambers said.

The Nexus switching family was announced in January 2008 with the Nexus 7000 switch as the first in the new product line.

Overall, Chambers is optimistic about his company's prospects for 2010 as his recession playbook and management strategy for driving collaboration within Cisco pays off.

"We're back to record profits and we did that during a very tough time, and that's still with allocating a huge amount of our resources to parallel areas, new market adjacencies that don't generate any revenue," Chambers said during his company's earnings call. "So our collaboration model is working."

Looking out at the broader economy beyond just Cisco, Chambers is also positive about the global economic recovery.

"Clearly, the signals to us were extremely good this quarter," Chambers said. "And I'm hard pressed to think of a single country leader or government leader [or] business leader that I've called on that wasn't more optimistic about their country momentum or their business momentum now versus just even six months [ago] in terms of direction."

Sean Michael Kerner is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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