Cisco: Data Center, Collaboration, Services Buoy Solid Q2

Cisco rode solid revenue growth in its data center, virtualization, collaboration and services to a stable second fiscal quarter, even as its quarterly profits declined year-over-year and areas that vexed Cisco in the previous quarter, including public sector revenues, continued to concern.

Overall, said Cisco Chairman and CEO John Chambers Wednesday, Cisco's revenues in categories like collaboration and data center virtualization are growing admirably. Customers are investing in Cisco's technology architecture vision, Chambers said, even if Cisco has seen some decline in key areas like switching and security.

For its second quarter, Cisco reported earnings of $1.5 billion, at 27 cents per share, down nearly 18 percent from the $1.9 billion, on 32 cents per share, it reported in the year-ago quarter. It reported revenues of $10.4 billion, a 6 percent increase from the $9.8 billion it reported in the year ago quarter. Analysts had been expecting $10.24 billion in revenue.

Guidance for Cisco's current and forthcoming quarters was disappointing, with Chambers predicting Q3 revenue increases between 4 and 6 percent, and Q4 revenue increases between 8 and 11 percent. Both ranges are below Cisco's oft-described growth target of 12 to 17 percent.

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Bright spots for Cisco were in its new product groups, which Cisco describes as data center, collaboration, security, wireless and the video-connected home. Overall revenue growth across those five categories was 15 percent, and according to Chambers, they represent 39 percent of Cisco's product revenue overall.

Collaboration, which includes the products Cisco acquired with Tandberg, saw a 37 percent year-over year revenue increase and is nearing a $4 billion annualized run rate, Chambers said.

Data center virtualization, in which Cisco's Unified Computing System (UCS) resides, grew 59 percent year-over-year, and UCS' specific year-over-year revenue growth was 700 percent. Vblock, the virtualized data center package for which Cisco partners with EMC and VMware, saw 40 new customers in the quarter, and has a $1 billion pipeline.

"The data center evolution is playing out as we anticipated," Chambers said on the company's Q2 earnings conference call Wednesday.

Wireless was up 34 percent, he added, while security and video-connected home both declined, at 9 percent and 4 percent rates, respectively.

Most notable among Cisco's mature product categories was a 7 percent year-over-year decline in switching. Chambers attributed the decline to competition and also noted that Cisco is in the midst of several major product transitions expected to yield switching products with dramatically better price performance.

He stated firmly that Cisco would not combat its decline in switching revenue with pricing.

"This is not a price game, this is a price performance game," Chambers said during the conference call's Q&A section.

He added that transitions in switching -- the transition from Cisco Catalyst switches to Nexus switches, for example -- were happening "faster than we expected." Routing and switching accounted for about 46 percent of Cisco's revenue, he said.

Routing itself was up 4 percent year-over-year.

Chambers said that services were continuing to be an integral part of Cisco's revenue, and now account for 21 percent of that overall revenue, with 67 percent gross margins.

Cisco's global public sector revenue grew 17 percent, and in the U.S., grew 9 percent during the quarter. But Chambers cautioned that state, local and federal IT spending will worsen in successive quarters.

Cisco also saw decreases in its set-top box business, down 11 percent overall, and in its overall consumer segment, which Chambers described as more challenging than Cisco expected.

Asked by analysts if Cisco would revise its stated 12 to 17 percent growth targets thanks to the slower quarterly growth seen in its fiscal 2011, Chambers said Cisco would go quarter-by-quarter to make that call.

Cisco's hiring was relatively flat in the quarter; it added 330 employees to reach a total headcount of 17,935.