Cisco Racks Up Big Q1 Earnings

Cisco sees robust growth ahead thanks to "phase 2" Internet development.

Cisco Systems' earnings jumped 37 percent in its first fiscal quarter of 2008, as company officials reported robust sales from a diversified product line and "phase 2" Internet growth..

Cisco's net income rose to $2.2 billion from $1.6 billion in the same quarter one year ago to total 35 cents a share on revenues of $9.6 billion for the quarter that ended Oct. 27, 2007.

CEO John Chambers highlighted two "key takeaways" for the quarter in Cisco's earnings call with financial analysts. The first "was a unique balance from a technology and business architecture perspective across 20 major product families," while the second was the growth driven by what he characterized as "phase 2 of the Internet," he said.

"We expect the second phase [of the Internet] will be driven by collaboration [and Web 2.0 technologies]. We achieved the clear number one position there and we intend to expand that position," he added.

Cisco saw revenues from its advanced technologies businesses grow some 27 percent, compared to a growth rate of 18 percent for routing and 8 percent for switching.

"Our advanced technology revenues [are] now larger than 20 percent of revenues from our routing products. We now have 10 product families (in advanced technologies) above $1 billion. We are gaining market share in most product categories, and we are getting the largest share of our customers' communications spend," said Chambers.


Click here to read more about Cisco's new Catalyst switching upgrades.

Cisco also saw strong growth in its services business in the quarter. Revenues for services were up in the quarter by 24 percent, representing 16 percent of Cisco's total product revenues. Services are seeing a "$6 billion run rate with 65 percent margins," said Chambers.

One fly in Cisco's financial ointment was the U.S. enterprise market, which Chambers characterized as "soft" compared to commercial and service provider markets. Vertical markets that dragged down Cisco's U.S. enterprise results were primarily financial services, automotive and retail market segments.


Although Cisco's switching growth was slower, that was due more to lower growth in modular switching. Cisco's switching results for low end, or fixed configuration switches grew in the mid teens, while its modular switching business was flat.

"We assume switching will have ebbs and flows, just like routing did. Switching ties [more closely] to the enterprise; routing is tighter with service providers," said Chambers.

The modular switching business could have been affected by lower spending among financial services customers, which tend to spend more heavily on modular switches than fixed configuration switches.

And Charlie Giancarlo, Cisco's chief development officer, also attributed the slowdown to Cisco's major new upgrades for the Catalyst 6500 and 4500 switching families. "Yesterday we launched major upgrades for the 4000 and 6000 line. Even before we announce, our top customers know this many months ahead of time. We expect some slow down as those transitions take place," he said.

But Cisco's commercial business as well as its service provider business both grew significantly, with commercial contributing 24 percent of Cisco's revenue growth while it's service provider business grew in the "high teens," Chambers said.

"Video is potentially the killer app for bringing value to [service providers'] networks. IP TV, Telepresence, Unified Communications, physical security and other video will require upgrades to existing networks," said Chambers, who also said Cisco upped its bandwidth load growth projections on those service provider networks from 300 percent in the next few years to 400 percent.

For its second fiscal quarter of 2008, Cisco expects revenues to grow 16 percent over the same quarter one year ago.


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