Optimistic Cisco Posts Revenue Rise

Despite a year-over-year loss in net income for the second fiscal quarter, Cisco projects success for its networking offerings.

Cisco Systems posted revenues of $6.6 billion for its second fiscal quarter of 2006, a 9.3 percent increase, but net income slipped to $1.38 billion compared to $1.4 billion in the same quarter a year earlier.

Earnings per share of 20 cents compared with 21 cents a year earlier, was due to the expensing of employee stock options, which began in this fiscal year. Excluding those stock option expenses, earnings were 26 cents a share beating Thomson First Call analyst estimates by a penny.

Cisco CEO John Chambers was upbeat about the results.

"It was a solid quarter from a revenue perspective, from an earnings perspective, and it was strong from an orders perspective. Product orders grew faster than revenues year over year," he said. That growth, in the "midteen range," was above guidance, he added.

The United States topped Ciscos list across its geographies with a 20 percent increase in orders year over year. The surprise from its business segments was among enterprise customers, which saw growth in orders in the "high teens year over year," Chambers said. Those growth rates were the best "weve seen in a long time," he said.

Regarding the companys Advanced Technology areas, which Cisco said it typically expects to become $1 billion businesses over a five- to seven-year incubation period, there was a decline in the Optical unit of 24 percent. It represents about 12 or 13 percent of all Advanced Technology area revenues, Chambers said.

Cisco in its earnings call announced its intention to roll that effort into its core routing and switching unit starting in the next fiscal year. While Cisco, based in San Jose, Calif., intends to maintain its investment in Opticals Dense Wavelength Division Multiplexing technologies, it will decrease its investments in Time Division Multiplexing integration, Chambers said.

The bright spot among the Advanced Technologies for the quarter was Ciscos Home Networking initiative, which became the third Advanced Technology area to hit the $1 billion run rate mark. At the same time, Cisco saw order growth of 45 percent for VOIP (voice over IP), with 7.5 million IP phones installed. Chambers said competitors were growing, by comparison, in single digits.

/zimages/2/28571.gifCisco reaches for a bigger networking slice, aiming to be a systems provider, not just a parts shop. Click here to read more.

In its core routing business, Cisco appeared to have lost some market share. Chambers downplayed that loss.

"The good news is we have 70 percent market share. We lost a couple of points over the last few quarters [due to] new players. We get reasonable grades here, but there is room for improvement," he said.

Other business highlights during the quarter include Ciscos agreement to acquire Scientific Atlanta for $6.9 billion in cash. It will become the new Digital Video Advanced Technology area for Cisco when the deal closes in this quarter.

Also during the quarter, Ciscos Integrated Services Routers exceeded a $2 billion run rate; Cisco boosted the number of CRS-1 high-end router customers in the carrier and service provider space to from 28 to 40 in the first quarter of fiscal 2006; and the company announced its plan to integrate 40G bps DWDM (Dense Wavelength Division Multiplexing) into the CRS-1. That, according to Chambers, is a key requirement for supporting IP TV.

/zimages/2/28571.gifRead details here about Ciscos Application Network Services initiative.

For the third fiscal quarter, Cisco expects overall revenues to grow between 10 to 12 percent year over year, and between 2.5 to 4.5 percent sequentially.

When questioned about Ciscos confidence during the earnings call, Chambers gave several reasons for the companys optimistic outlook.

"The network is becoming all forms of communications—data, voice, video, mobility. A lot of the big bets we made that people doubted—our security architecture, data center, home networking—look like they will play out well. Customers are telling us were winning architecturally. Are we immune? No. But we are getting a bigger share of [customers IT] wallet. The network is becoming exciting again," he said.

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