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Cisco Q4 Profit Declines, But Chambers Sees Move To 'The Next Cisco'

Cisco's stronger-than-expected Q4 earnings anticipate a bounceback for Cisco following its ongoing corporate restructuring.

Cisco took an expected blow to its bottom line during its fiscal fourth quarter but also showed signs of stabilizing as the company continues a broad corporate restructuring expected to remove $1 billion in expenses by the end of its fiscal 2012.

Cisco Chairman and CEO John Chambers said that moving into its fiscal year, Cisco observers will see a "very focused, agile, lean and aggressive company." Chambers and his team projected sales to grow between 1 percent and 4 percent in the first quarter.

"To summarize it simply, our entire company is ready to accelerate," Chambers said during Cisco's fourth quarter conference call Wednesday.

For its fourth quarter, Cisco profit fell 36.3 percent to $1.2 billion, compared to $1.9 billion in the same quarter a year ago. The networking titan posted sales of $11.2 billion, up 3.3 percent from $10.8 billion a year earlier.

Cisco's adjusted earnings came in at 40 cents per share, higher than the 38 cents most analysts had predicted heading into Wednesday's earnings announcement. Analysts had also projected $10.98 billion in revenue, according to Thomson Reuters.

Cisco for its full-year fiscal 2011 reported net sales of $43.2 billion and profit of $6.5 billion in a GAAP basis.

Cisco shares gained as much as 12 percent in after-hours trading following the stronger-than-expected earnings report.

Cisco has begun paring down its workforce behind a previously announced layoff of 6,500 full-time employees, and in the past two quarters, restructured its global sales and engineering organizations in an effort to make decision-making more streamlined. All will help transform the company into what Chambers described on the call as "the next Cisco."

According to Gary Moore, Cisco executive vice president and COO, the restructuring has reduced deal approval time by more than 65 percent, and has also translated into higher conversion rates and higher win rates for Cisco. Among the key moves, he said, was the change from seven engineering heads to two, a co-leadership team led by Cisco Senior Vice Presidents Padmasree Warrior and Pankaj Patel.

Among employee cuts, Moore said that Cisco's restructuring will reduce its population of vice president-level and higher employees by about 17 percent. He said that Cisco also planned to cut about 1,200 contract workers during the first quarter.

About 1,600 employees left Cisco during the fourth quarter, according to Frank Calderoni, executive vice president and CFO, most of them accounted for in Cisco's consumer unit restructuring and its Voluntary Early Retirement Program. Cisco exited the quarter with 71,825 employees.

Cisco, as previously announced, is selling a set-top box factory located in Juarez, Mexico, to Foxconn Technology Group -- a move that will trim another 5,000 employees from Cisco. Moore stressed, however, that Cisco remains committed to its set-top box business.

Next: Areas of Strength, Weakness For Cisco


As expected, Cisco continued to post declines in its public sector business and its overall switching business during the fourth quarter. The public sector business, which accounts for 20 percent of Cisco's revenue, saw an 4 percent decline in the quarter overall, a 7 percent decline in the U.S. and an 18 percent decline specific to the federal space.

Switching revenues declined 4 percent, although total switching orders gained 6 percent in the quarter, according to Cisco.

Several of Cisco's fastest-growing businesses continues to gain during the fourth quarter. Revenue in its collaboration unit, for example, grew 11 percent year-over-year in the quarter, with TelePresence products in particular growing 24 percent by revenue.

Data center and virtualization product revenues also grew, at a rate of 32 percent. Cisco's Unified Computing System (UCS) has exceeded its $1.1 billion order run rate, Chambers said, and grew about 129 percent year-over-year in revenue. Cisco gained about 2,000 UCS customers in the quarter, and total UCS customers now number more than 7,400.

Video has also been a growth story, and Chambers noted that Tandberg is now fully integrated into Cisco, and all of Cisco's key routing and switching are now integrated for Medianet, Cisco's IP video architecture.

What's more, said Chambers, Cisco is seeing an impressive attach- and pull-through rate for its routing and switching products with sales of UCS and video, with that occurring on about 50 percent of UCS and video deals.

During the call, Cisco did not announce any other major changes to its product portfolio or market segment focuses as some observers had predicted, though Moore did mention Cisco's choice to de-emphasize investment in energy management devices.

Cisco will make a firm decision on the future of its Cisco Network Building Mediator product, which addresses utility usage in buildings, at a later date, he said.

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