Cisco posts higher profit and revenue in Q2

CEO Chambers sees a 'soft recovery' in the world economy

Cisco Systems posted higher revenue and profit in its fiscal second quarter as Chairman and CEO John Chambers reiterated the company's ambitious goal to become the biggest company in IT.

For the quarter ended Jan. 26, Cisco posted revenue of US$12.1 billion, up 5 percent from a year earlier.

Its profit grew even more from the previous year's quarter, with net income rising 44 percent to $3.1 billion. Second-quarter earnings per share rose to $0.59, up from $0.40 a year earlier. However, those figures included tax benefits of about $926 million from a settlement with the U.S. Internal Revenue Service and the reinstatement of a federal R&D tax credit. Excluding most one-time items, its profit increased to $0.51 per share, above the consensus analyst estimate of $0.48 per share.

Cisco is in the midst of a retreat from the consumer sector while it aims for a leading role in enterprise and cloud computing, competing with giants such as IBM and Hewlett-Packard. In December, the company told financial analysts that it hopes to double its software revenue over the next three to five years and also expand its managed services and consulting business. Cisco's annual software revenue is about $6 billion.

Last month, the company said it would sell its Linksys home networking division to Belkin, a smaller competitor in that market. The move came as no surprise after Cisco killed its Flip video camera and started retreating from its home videoconferencing business in 2011. The company still hopes to reach into consumers' homes with gateway boxes that it sells to service providers.

Cisco is also seizing a growing piece of the mobile infrastructure market. After the company announced its fiscal first-quarter earnings in November, Chambers said Cisco would build small cellular base-station equipment in addition to carrier Wi-Fi gear.

On a conference call following the financial report on Wednesday, Chambers said he thinks the world economy is in a "soft recovery."

"The tone is cautious optimism," Chambers said. However, customers in Europe are still under pressure, he said.

Cisco's intention is to change from a top communications vendor to a top IT company. It made progress toward that goal in the second quarter with gains in its data center business, which includes the UCS (Unified Computing System) servers as well as the Nexus switch line. Data-center product revenue grew 65 percent, and Cisco now has about 20,000 UCS customers, Chambers said.

Betting on mobile carrier networks has paid off for Cisco, which doubled its revenue from service-provider Wi-Fi in the quarter. Service-provider video revenue grew by 20 percent, and Chambers said Cisco was aiming that business at profitability, turning down sales of low-margin set-top boxes in favor of its Videoscape back-end delivery architecture.

Some other businesses, including the collaboration unit, saw orders flat or down. Switching revenue rose just 3 percent and routing was down 6 percent.

Business conditions seem to be improving in some parts of Europe, such as Germany and the U.K., but are still poor in Southern Europe, Chambers said. "You're going to see Southern Europe remain tough," Chambers said.

Cisco expects revenue in the current quarter to increase by between 4 percent and 6 percent. It forecast earnings per share, not including one-time items, of between $0.48 and $0.50 per share.

Cisco's orders in China were down by 4 percent in the quarter, reflecting ongoing pressures the company faces there, Chambers said. In November, he said opposition to Chinese networking giant Huawei in the U.S. government had affected Cisco's business in the country.

"While we believe the China decline may last for several quarters, we are committed to the China market," Chambers said on Wednesday. The company hopes to be competitive in Chinese LTE projects that are expected to start in the second half of this year. "We will earn the confidence of the Chinese people," Chambers said.

Stephen Lawson covers mobile, storage and networking technologies for The IDG News Service. Follow Stephen on Twitter at @sdlawsonmedia. Stephen's e-mail address is stephen_lawson@idg.com

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