Cisco's Q1 bodes well for U.S. enterprise, UCS

Cisco's Q1 bodes well for U.S. enterprise, UCS

Summary: Cisco CEO John Chambers stopped short of saying IT spending has recovered in the U.S., but sounded optimistic.

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Cisco's first quarter results, which were better-than-expected, may allay some concerns about U.S. enterprise technology spending. What remains to be seen is whether Cisco is seeing a broader trend or just faring better than its key rivals.

The networking giant reported first quarter earnings of $2.1 billion, or 39 cents a share, on revenue of $11.9 billion, up 5.5 percent from a year ago. Non-GAAP earnings were 48 cents a share, two cents better than Wall Street expectations.

For the second quarter (story, statement), Cisco projected revenue growth of 3.5 percent to 5.5 percent from a year ago. Non-GAAP earnings per share in the second quarter are expected to be 47 cents a share to 48 cents a share. That outlook was better than expected.

Cisco shares were up 7 percent in early U.S. trading. 

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But the biggest takeaway from Cisco's results and earnings conference call is that U.S. businesses appear to be spending on technology. Cisco CEO John Chambers stopped short of saying IT spending has recovered, but sounded optimistic.

Also: IT spending slowdown, emerging trends reshuffles megavendor deck

What's notable here is that Cisco typically sees trends early. Cisco gets whacked with a spending slowdown before rivals see it. The company also sees a rebound before others.

Chambers said:

While we feel very good about our performance and our opportunity, we all understand the uncertainty in the current macroeconomic environment. Specifically, we are modeling Europe to get worse before it gets better. We see signs of improvement in the US in both Enterprise, Service Provider, and Commercial. Unfortunately, it's still too early to call this a trend, though we are continuing to see what we like. And we feel good about our momentum in Asia-Pacific, Japan, and China, and anticipate this region to continue to be our fastest-growing region in the world.

Chambers then added that he expects the U.S. to lead the world out of the economic doldrums.

We believed for almost a year that for the U.S. has to lead the total globe out of this economic slowdown. It's not going to come from Europe, and while we were all hopeful about emerging countries, they just aren't going to be strong enough to really drive us out of this slowdown. So, we're watching very carefully the spending in the U.S. enterprise. The U.S. enterprise has grown literally as you look over this last year in terms of the direction, a year ago it was 15% growth, then it was 5%, then 0%, then 5%, and then this quarter 9%. And the number of large deals are up both in terms of the number and the size of those deals pretty solid.

What's uncertain is whether Cisco's take will be similar to what other tech giants are seeing. Chambers said that Cisco was seeing its Unified Computing System (UCS) effort, which revolves around servers and integrated data center gear, pull in sales of its routers and switches. "This is especially important in terms of how CIOs are beginning to view Cisco, not just as the leader in communications, but view us as an IT player who also does communications," said Chambers.

Analysts said that Cisco may be taking share from large rivals. "The key positive, in our view, is evidence that the company’s aggressive posture is paying off in terms of market share gains against larger key rivals. On a relative basis, we believe the company is better positioned than its large competitors to navigate the challenging environment," said Wedbush analyst Rohit Chopra.

Other key takeaways on Cisco:

China sales were flat, but Cisco indicated that the market is key to the company's future. Chambers said:

We are committed to China. We are invested full force. We will partner in China and we'll work through ups and downs in the China market. We do think with the challenges going on that we will be under pressure in China for the next up couple quarters, and we've modeled that into our business analysis, but as I alluded to earlier, the Chinese are very effective in government and business. They will do what's right for the long-term, and candidly we will earn their trust and the ability to partner in the country. So I don't model that for a sustained issue. I see it a couple quarter issue in terms of how we move in that marketplace.

EMC is a key partner, but VMware's acquisition of Nicira changes the equation a bit. "The Nicira deal did clearly put pressure on us and them in terms of the relationship. They're (EMC) going to continue to be our strongest partner, and we're going to be very good there together," said Chambers. "In terms of opening up, however, the relationships, you are seeing us move with Citrix and you saw the first of a series of announcements there. You're going to see us get closer to players like NetApp and Red Hat, probably Microsoft, IBM if they'll have us. And you will see us do much what VMware has done in terms of an open approach to the markets supporting all four hypervisors, multiple players on this dock, et cetera."

Topics: Networking, CXO, Cisco, Data Centers

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