Cisco earnings: Challenges multiply, outlook disappoints

Cisco delivered solid first quarter earnings and said it is focused on "execution in the areas we can control." In other words, capital spending is tailing off for some of Cisco's businesses. And one of the areas where's it's becoming most evident is government spending.

The company reported first quarter net income of $1.9 billion, or 34 cents a share. Non-GAAP earnings were 42 cents a share. First quarter revenue was $10.75 billion, up 19.2 percent from a year ago. Wall Street was expecting earnings of 40 cents a share on revenue of $10.74 billion.

In a statement (preview), Cisco CEO John Chambers said he was pleased with the company's "solid financial results, during a challenging economic environment."

But in a call with analysts, he was clear about "challenges" that the company is facing, notably government spending, service providers and Europe. Globally, orders in the public sector segment were up 6 percent and that growth in U.S. federal government and emerging markets was "solid." Orders from U.S. state governments, however, were down about 25 percent.

Likewise, European governments, which have seen their budgets "reduced dramtically" is down. And the company expects that the trends will continue for the next couple of quarters.

In terms of the service provider business, the segment saw a growth rate of 8 percent from a year ago but that US was down 2 percent. Specifically, cable operators were a challenging area, with orders down more than 30 percent. Drilling down further, the set-top business is down 40 percent in orders.

Still, Chambers remained upbeat and bullish about the transitions that are taking place in the markets, noting areas such as telepresence and unified computing as new areas that are seeing acceptance and adoption.  He offered a reminder that these product segments are still very much in their early years but that they are "gaining more momentum and customer acceptance than many would have thought just a year ago." He said:

What i am most pleased about is how the business architecture and technology architecture is gaining customer acceptance.

He also said that he believes a tipping point has occurred in the minds of CIOs when it comes to video. They followed the CEOs lead when it came to interest in telepresence as a way of saving on travel expenses but since then have become bullish on how the technologies are "enabling major production gains and process gains."

He said the Cisco offerings are appealing, especially to large enterprises, in part because of how Cisco bundles their architectures - whether collaboration, traditional networking or video - to "tie it all together as an architectural play."

Looking ahead, the company was cautious, noting again that the challenges in the public sector segment could be around for the next few quarters. For the second quarter, the company is projecting revenue growth of 3-5 percent, year-over-year. For the year, the company is projecting annual revenue growth of 9-12 percent. It forecast non-GAAP earnings of 23-25 cents per share.

Other highlights:

• The company changed the way it reports revenue by product categories by changing "advanced technologies" to "new technologies." It will now include data center, collaboration, security, wireless and Video Communications Home as subcategories. The core routing segment was unchanged.
• The company also consolidated its Japan segment into Asia-Pacific, leaving it with 4 total, including U.S. and Canada, European markets and emerging markets as the others.
• Days sales outstanding were 38 days at the end of the quarter, compared to 41 days at the end of the third quarter.
• Inventory turns were 11.2 in the first quarter, down from 12.6 in the fourth quarter and 11.6 a year ago.
• Cisco ended the quarter with $38.9 billion in cash, equivalents and investments.
• It hired 1,900 employees, 150 of which came from acquisitions.