Cisco: Q4 Possible Tipping Point For Recovery

Continuing to call fiscal 2009 "the toughest economic challenge of our time," Cisco Chairman and CEO John Chambers on Wednesday saw a silver lining in the dark financial cloud, calling the company's fourth quarter the possible tipping point toward stabilization.

While he said it was still "too soon to call it a recovery," Chambers said that Cisco's orders began to normalize during the company's fourth quarter, ended July 25. Sequential product orders increased 10 percent from the third to fourth quarter, marking the first time in 2009 that sequential product orders weren't 10 percent to 15 percent below normal. The sequential order growth shows that Cisco will "return to normal business momentum" in one to two quarters' time, Chambers said during a conference call revealing Cisco's fourth quarter earnings.

"If we continue to see these positive order trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occurred in our business," Chambers said.

The channel played a strong role in that sequential order growth, with orders through the channel replenishing in the fourth quarter, Chambers added.

"It does indicate increased channel confidence," he said. "We saw that throughout the quarter."

The channel also is at the forefront of Cisco's battle with Hewlett-Packard in the data center and in the switching segment, Chambers said. Though Chambers didn't specifically address Cisco's rumored price war against HP's ProCurve Networking division, he said Cisco is continuing the fight.

"I think we're doing extremely well in our channel programs," he said. "We're more than holding our own both on the competitive landscape and in the channels."

Despite slight order growth, Cisco's fourth quarter earnings illustrate that network spending continues to take a hard hit.

Overall, Cisco's fourth quarter revenue was $8.5 billion, down 18 percent from $10.4 billion in the 2008 fourth quarter. The company posted earnings of $1.1 billion in the quarter, down 46.3 percent from $2 billion in the fourth quarter a year ago. For the year, Cisco sales dropped to $36.1 billion, down 9 percent from 2008. Profit for the year fell to $6.1 billion, down 23.8 percent from $8.1 billion in 2008.

Cisco's total product revenue fell a total of 22 percent year over year in the fourth quarter, while switching revenue fell 20 percent, routing sales fell 27 percent and advanced technologies sales dropped 19 percent. For the year, router sales fell 21 percent, switching revenue dropped 11 percent and advanced technologies sales slipped 4 percent.

Still, Chambers offered an air of optimism during Wednesday's fourth quarter earnings call. He said Cisco's cost reduction and resource restructuring efforts are complete and that Cisco has exceeded the $1.5 billion in cost reductions it planned. Cisco's "limited restructuring" effort, which was estimated to lead to 1,500 to 2,000 job cuts in the second half of 2009, also is complete. In all, more than 2,000 jobs were cut, 1,013 in the fourth quarter.

And while Chambers said Cisco is continuing with cautious optimism, the CEO estimated that the first quarter of fiscal 2010 would see Cisco suffer a drop in revenue between 15 percent and 17 percent.

A first quarter revenue dip will also come amid Cisco ramping up on strategic acquisitions, including its purchase of consumer blockbuster Flip Video camera maker Pure Digital Technologies Inc., which fits snuggly into Cisco's video strategy not just in the consumer segment, but also in the enterprise, where the fourth quarter saw Cisco receive its first $1 million commitment for Flip from an enterprise customer.

The small to midsize business market also is a key growth area as Cisco moves into 2010, Chambers said, calling the SMB market "one of the fastest growth opportunities." He said he foresees Cisco combining its SMB product and cloud services offerings and making SMB services available through the channel.

"We are beginning to see signs of recovery and small businesses are expected to spend $7 billion on networking products," Chambers said.

And Cisco is making waves with its data center strategy, which in March saw the unveiling of Cisco's Unified Computing System (UCS), Cisco's architecture that combines computing, networking, virtualization and storage. UCS is in limited availability currently, but during the next few quarters Cisco will make UCS more widely available. So far, however, the first orders and production deployments have been smooth, Chambers said. From there, it's up to Cisco to continue the charge and tie UCS into its growth strategy and plans in the cloud.

"It's too early to call for sure, but I couldn't be more pleased with the start," Chambers said.

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