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Analyst: Low-cost markets to springboard Cisco's growth

Networking giant sees better-than-expected second quarter earnings, and analyst expects investments in low-cost markets such as India to propel Cisco's continued push into high-growth cloud business.
Written by Liau Yun Qing, Contributor

Cisco Systems will look to lower-cost markets such as India to develop more products, particularly for the cloud computing arena, to continue its growth momentum after the networking giant reported better-than-expected earnings for its fiscal second quarter, according to one analyst. 

The company announced on Wednesday that its net sales for the second quarter was US$11.5 billion, which represented a 10.8 percent year-on-year increase from 2011's US$10.4 billion Net income showed even better growth, with a 43.5 percent growth over the same timeframe to reach US$2.2 billion, it disclosed.

Cisco CEO and Chairman John Chambers said in the statement: "We are executing well on our three-year plan to drive earnings faster than revenue. Our operational focus continues to yield positive results--we hit our billion-dollar-expense reduction a quarter early--and our ongoing innovation enables our customers to solve their critical business needs. You will continue to see a focused and aggressive Cisco that is helping our customers use intelligent networks to transform their businesses."

Low-cost base key to sustained growth
Commenting on the company's second quarter results, Cassandra Mooshian, analyst at Technology Business Research (TBR), said the company's margins are expected to stabilize near its current levels throughout the year as it benefits from its leaner cost structure while it increases hiring in low-cost regions, namely India.

Beyond the earnings, she noted in a statement on Wednesday that the 405 new employees added in the previous quarter were largely in its services division, particularly in its advanced and technology service lines, as Cisco continues to invest in its cloud and connected grid portfolios of products and services. The company had earlier predicted that global cloud computing traffic will grow 12-fold by 2015, and the analyst believes it is gearing up to "gain traction" in the high-growth cloud market.

"TBR believes the firm will continue to invest in cloud hardware and solutions that will promote consulting and systems integration opportunities as customers move to virtual IT infrastructures," Mooshian stated. 

To achieve this, she pointed to Cisco's plans to build a new development center in India, which will hold 6,000 employees, as an example. This investment will add to the other centers currently in Bangalore, Pune and Chennai, she added.

"TBR believes Cisco Services is looking to utilize low-cost resources to continue the development of solutions, as over 396 patents have been rewarded in India since 1998," Mooshian added.

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