Cisco Restructuring Pays Off: Q2 Profit Jumps, More M&A Expected

Cisco on Wednesday said it had reached its goal of trimming $1 billion in operating expenses a quarter earlier than expected, and that following a solid fiscal Q2 of nearly across-the-board revenue and profit growth, would pick up the pace of its investment in several areas, including mergers and acquisitions.

Cisco Chairman and CEO John Chambers that its Q2 numbers are proof Cisco's lengthy, often-painful restructuring effort has paid off, and that its priorities are now better aligned to how customers are making IT buying decisions.

"We met with over 100 of our top customers ranging from government leaders to service providers, enterprise and partners, and I can say I believe almost without exception we are gaining mindshare and most of the time, wallet share," Chambers said during Cisco's Q2 earnings conference call, describing his team's recent meetings at the World Economic Forum in Davos, Switzerland.

For its second fiscal quarter of 2012, Cisco reported profit of $2.18 billion, or about 40 cents per share, up 43.5 percent from $1.52 billion in the year-ago quarter. Revenue was $11.5 billion, up 10.8 percent from $10.4 billion a year earlier. Both numbers were slightly above most analyst estimates.

Chambers described Cisco as having made "significant progress," and noted that Cisco exceeded the 7 to 8 percent revenue guidance it had previously stated for Q2 in its November 2011 forecast.

"We are gaining more of our customers' spend on IT as evidenced by our growth compared to our competitors," he said.

Among specific segment highlights, Cisco said its switching revenue grew 8 percent year-over-year and that its gross margins for switching have returned to about where they were two years earlier. Its services revenue also grew significantly -- 11 percent year over year -- and Chambers said services, where Cisco has a particularly well-regarded strategy with solution provider partners, would play an increasingly big role in Cisco's revenue performance.

Data center and collaboration also remain areas of strength for Cisco. In data center, Chambers touted 10,763 Unified Computing System (UCS) customers as of Q2, and 91 percent year-over-year revenue growth for UCS in the quarter. A highlight in collaboration was Cisco's emerging video technologies business, which includes physical security, analytics and media processing and grew 59 percent year over year.

Cisco's total product orders grew 7 percent year over year. By market segment, only public sector product orders declined, by 1 percent, and Cisco's product orders grew by 7 percent in enterprise, 7 percent in commercial (how Cisco describes midmarket and SMB), and 12 percent in service provider. In an apparent dig at rival Juniper Networks, which saw a revenue shortfall in its most recent quarter based on what it said was weak service provider demand, Chambers said Cisco's performance in the service provider market was proof customers were most interested in its integrated architectural approach.

By region, Americas revenue grew 9 percent year over year, EMEA revenue grew 15 percent and Asia-Pacific, China and Japan grew 11 percent. Among individual territories, Cisco said Japan and Canada were the largest year-over-year growers for the quarter, at 29 percent each.

Chambers added that following a year of "curtailed M&A activity" while it dealt with restructuring, Cisco expected its usually robust M&A pace to resume.

"We expect to be more active with acquisitions in the quarters to come," Chambers said.

Cisco is guiding revenue growth between 5 and 7 percent for its third quarter.

Cisco CFO Frank Calderoni added that the company ended its second quarter with total headcount of 63,870, and had increased its quarterly cash dividend to 8 cents per common share of Cisco stock.

Cisco's progress following its restructuring year will be closely watched by solution providers, who have been promised a slimmer, less bureaucratic and more efficiently run business partner. In a recent interview with CRN, Cisco's Jim Sherriff, senior vice president, U.S. and Canada partner organization, said that restructuring effort would be particularly important as Cisco continues to organize its partner strategy for the cloud computing era.