Cisco Q3 solid, manages dicey IT spending; Q4 outlook cut

Cisco holds up well in the third quarter in "a cautious IT spending environment."
Written by Larry Dignan, Contributor

Cisco Systems' fiscal third quarter results were solid as the company avoided the shortfalls rivals faced.

The company reported third quarter earnings of $2.2 billion, or 40 cents a share, on revenue of $11.6 billion, up 6.6 percent from a year ago. Non-GAAP earnings were 48 cents a share.

Wall Street was expecting earnings of 47 cents a share on revenue of $11.59 billion. Going into Cisco's earnings, analysts were expecting a mixed quarter. After all, Cisco rivals Juniper, Riverbed and Polycom all struggled with their most recent financial results.

In a statement, Cisco CEO John Chambers said the company plans to grow profits faster than revenue. "In a cautious IT spending environment, we continue to outperform our competitors," he said.

On a conference call, Cisco CEO John Chambers said:

  • The company has taken share in the service provider market. "We remain number one or number two in almost every product market where we play," said Chambers.
  • Cisco maintained share in the enterprise and commercial market.
  • UCS server revenue was up 57 percent from a year ago.
  • Data center revenue was up 67 percent in the quarter.
  • Collaboration revenue was flat.
  • Wireless sales were up 20 percent.
  • Service provider video revenue was up 12 percent.
  • Security sales were up 9 percent.
  • Switching gross margins are stable.

As for the outlook, Chambers remained cautious about IT spending. He said:

We are still in an uncertain environment economically and in global perspective. We continue to see the impact of the areas of concern we have discussed for the last few quarters. Those were just to repeat them, Europe and the global economy, India, and conservative IT spend as reflected in the commentary of our peers. Each of these areas has proven to be as challenging as we anticipated and several, Europe and customer conservatism, have gotten worse.

Indeed, Chambers said EMEA product orders were flat, Russia was up 22 percent and Asia Pacific and China jumped 7 percent from a year ago. India demand remains weak. China declined 8 percent as large deals failed to close in the quarter.

For the fiscal fourth quarter, Cisco said non-GAAP earnings will be 44 cents a share to 46 cents a share with revenue growth of 2 percent to 5 percent. Wall Street was expecting non-GAAP earnings of 49 cents a share.

Chambers continued:

As you have seen in our enterprise order growth and the trends over time, we are seeing hesitant spending environment. At this time, we are not seeing a significant downturn in the environment nor are we seeing new challenges in our own business. We are seeing longer sales cycles, more signoff and smaller deal size.

Chambers was also asked about whether there was another global economic downturn on deck. He said:

When I talk to our customers, they do not see that occurring in their environment and even in the areas that have been going slow like service providers and financial services have said their plans are to spend more in the second half of the year. However, in the very next sentence they said we are waiting to see what happens in Europe and what happens with government policy.

By the numbers:

  • Research and development spending was $1.36 billion in the third quarter, down from $1.43 billion a year ago.
  • Inventory turns were 11.5 in the third quarter, up from 11.1 a year ago.
  • Cisco ended the quarter with $48.4 billion in cash and equivalents.
  • Cisco generated $3 billion in cash flow in the third quarter.
  • Days sales outstanding were 31, down from 37 a year ago.

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