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Cisco: Enterprise IT Leading the Recovery

Cisco earnings and the economy
U.S.-based enterprise IT spending became one of the early casualties in the recession, and according to Cisco CEO John Chambers, it is becoming one of the first indicators to show that a recovery is now in progress.

Chambers' comments came during Cisco's first-quarter fiscal 2010 earning call late Wednesday. While optimistic that the economy is rounding a corner, Cisco's reported sales for the quarter were down by 13 percent from a year ago, to $9 billion.

That still proved better than Wall Street expectations of $8.7 billion in revenue, however, according to Thomson Reuters. Cisco also posted a profit of $1.8 billion, or $0.30 per share -- down 19 percent from the $2.2 billion or $0.37 per share in income it saw a year ago. Minus one-time charges, that figure rises to $2.1 billion or $0.36 per share, topping analyst forecasts of a $0.31 per-share profit.

"Our overall orders on a global basis in Q1 were down in the high-single-digits from a year-over-year perspective, while the U.S. year-over-year orders were approximately flat," Chamber said. "To put this in perspective, product orders from the last three quarters in the U.S. declined by an average of approximately 30 percent year over year. Therefore, to have Q1 orders in the U.S. grow year over year at a flat rate was, in our opinion, a major inflection point. "

Chambers added that in his view, enterprise IT spending is an indication of renewed optimism in the economy and he expect that other sectors will follow.

"Enterprise was the first one in to slow down -- it was down even last quarter, 20 percent year over year, and yet this quarter it was up 10 percent in the U.S," he said. "So just like the major enterprise accounts were the first one in, followed by service providers, followed by medium-sized business, followed by small, we think the trend will come out the same way."

Looking ahead to Q2 and UCS

Moving forward, Chambers provided revenue guidance for its second fiscal quarter for revenue to increase in the 1 percent to 4 percent range compared to a year ago.

It's not yet clear how much of that growth will come from new offerings. One key Cisco initiative that has yet to seriously impact the company's bottom line is its Unified Computing System (UCS), which debuted earlier this year. UCS is Cisco's first foray into the server market and combines switching technology with application servers.

"Initial results look very solid," Chambers said about the UCS. "There are very few accounts in the world that won't take a hard look at this, and so the key is can we translate those pilots and can we translate the initial systems into those accounts into real meaningful, measurable volume."

On the other hand, Cisco's ASR routing platform, which debuted in March 2008 after $250 million in research and development, is now starting to bear solid results for the company.

Chambers said that Cisco now has over a thousand ASR 1000 customers and that he expects sales of $500 million for the platform during fiscal 2010.

Acquisitions pave the way forward

Chambers also discussed Cisco's aggressive efforts in acquisition and partner activities over the past month. Earlier this week, Cisco started a joint venture with EMC and VMware to help deliver integrated virtualization solutions called Vblocks to enterprises and service providers.

In recent weeks, Cisco has also made acquisition bids for the set-top box unit of China's DVN, SaaS security from ScanSafe, wireless technology from Starrent and an expanded video conferencing business from Tandberg.

The Tandberg deal is now facing some shareholder resistance, which is a topic that Chambers addressed during the call.

"I believe that we will get this transaction closed," Chambers said. "But at the same time, as you also know, that we have already walked away from a couple of deals this year where we could not get the right pricing."

"Pricing is important to us and the premium that we put on versus prior to rumors going on in the market in early July is a 38 percent premium," he added. "So we think we have a healthy premium on that."

With its recent string of bids and its new partnership with EMC and VMware, Chambers also took the time to explain why Cisco chooses to partner in some cases, and in other instances, acquire.

"General rule of thumb: Partner big-to-big, acquire big-to-small," Chambers said. "When you move into a market, you’ve got to get it before the market is obvious, if you are going to do it with internal development. Once the market starts to take off, you acquire one of the top five players, ideally one or two, and you don't move into a market where you don't have a reasonable probability of becoming the No. 1 player, ideally with 40 percent-plus market share."