Cisco Reports Strong 3Q, Says SDN To Have Positive Future Impact On Company

Cisco on Wednesday surprised Wall Street by reporting its ninth consecutive quarter of record revenue and earnings that exceeded expectations.

Cisco Chairman and CEO John Chambers cited a slow but steady improvement in the U.S. and other economies combined with having the kind of products customers need for the company's successful third fiscal quarter of 2014, which ended April 27.

Cisco, in response to questions from analysts on Wednesday's third-quarter conference call, also said that software-defined networking (SDN) will have a positive impact on Cisco in the future, and that its Cisco UCS server business is booming thanks to solutions and architecture sales and not because of bare metal server demand.

[Related: Software-Defined Data Centers: Should You Jump On The Bandwagon? ]

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For the quarter, Cisco reported sales of $12.2 billion, up 5.4 percent over the $11.6 billion reported for the third fiscal quarter of 2012.

Income on a GAAP basis was $2.5 billion, or 46 cents per share, up about 15 percent over the $2.2 billion or 40 cents per share reported for the same period of last year. On a non-GAAP basis, income was reported as $2.7 billion or 51 cents per share, up from the $2.6 billion or 48 cents per share from last year.

The third-quarter results beat widely reported analyst expectations of $12.18 billion in revenue and earnings of 49 cents a share. The market loved the results and in after-market trading drove Cisco share prices up by 8 percent within a couple hours of the unveiling of the financials.

Cisco did particularly well in the U.S. market, where revenue rose 7 percent to $7.1 billion, Chambers said. That growth was across the board, with U.S. commercial revenue up 13 percent over last year, enterprise revenue up 10 percent, solution provider revenue up 10 percent, and public sector business up 5 percent despite a 3 percent drop in revenue from federal government customers.

"This balanced approach to growth is a positive signal for growth going forward," he said.

Cisco's third-quarter results also stemmed in large part from the company hitting its goals, Chambers said. "Bottom line, we again did what we said we'd do," he said.

Frank Calderoni, Cisco executive vice president and CFO, said Cisco's earnings per share have now grown faster than revenue for six consecutive quarters despite a difficult economic environment.

NEXT: Adoption Of SDN Good News For Cisco: Chambers

Product revenue was up 5 percent year-over-year, while services revenue rose 7 percent, Cisco's Calderoni said. Services revenue this quarter grew slower than in past quarters because of slower product sales in the last two quarters, he said.

For the quarter, switching product revenue fell 2 percent from last year to $3.6 billion, NGN (Next-Generation Networking) routing product revenue was steady at $2.1 billion, service provider video revenue up 30 percent to $1.3 billion, collaboration product revenue down 1 percent to $1.0 billion, data center product revenue up 77 percent to $515 million, wireless product revenue down 4 percent to $327 million, other product revenue down 41 percent to $144 million, and services revenue up 7 percent to $2.7 billion.

Cisco's Chambers said any concerns about how a coming shift toward software-defined networking (SDN) might impact Cisco have been overblown.

Cisco currently has 50 beta customers in the Cisco ONE (Open Network Environment) architecture, which includes OpenFlow and OpenStack technologies, and it is one of the leaders in the open source OpenDaylight project.

"We feel very confident in our leadership in the market," he said.

When asked during the question-and-answer period of Wednesday's financial conference call about how Cisco's margins might shift because of software-defined networking, Chambers said SDN is not a software game but instead is an architecture in which hardware, software and ASICs work together. Cisco's SDN strategy also leverages the company's installed base, he said.

Chambers said not to expect a big jump in revenue, but instead a growth in recurring revenue over time.

He also said that, if the market expected SDN to have a major negative impact on Cisco, the company's third-quarter results would not have been nearly as strong as they were.

Robert Lloyd president of Cisco's development and sales, echoed Chambers by saying that SDN will not be a software-only play.

"We continue to see evidence in the marketplace. ... It's great hardware and Cisco software that will drive SDN," Lloyd said.

A big part of the 77-percent growth in data center products stems from sales related to Cisco UCS servers, which Chambers said is on an annual run rate of over $2 billion.

However, in response to an analyst question, Chambers said those sales are growing not because of a demand for the servers themselves but for solutions built around converged infrastructure, the cloud, and together with Cisco Nexus switches.

"It is largely an architecture sale," he said.

Looking forward, Calderoni said Cisco expects fourth fiscal quarter 2014 revenue to grow between 4 percent and 7 percent over the same period of last year. Non-GAAP earnings per share is expect to be 50 cents to 52 cents, with GAAP earning per share between 7 cents and 10 cents lower than that.